tatement of Cash Flows (Indirect Method) The Madison Company’s income statement and comparative balance sheets as of December 31 of 2019 and 2018 follow: MADISON COMPANY Income Statement For the Year Ended December 31, 2019 Sales Revenue $825,000 Cost of Goods Sold $530,000 Wages and Other Operating Expenses 179,000 Depreciation Expense 29,000 Patent Amortization Expense 6,000 Interest Expense 18,000 Income Tax Expense 25,000 Gain on exchange of land for patent (37,000) 750,000 Net Income $75,000 MADISON COMPANY Balance Sheets Dec. 31, 2019 Dec. 31, 2018 Assets Cash $67,000 $25,000 Accounts Receivable 64,000 49,000 Inventory 85,000 66,000 Land 117,000 160,000 Building and Equipment 441,000 353,000 Accumulated Depreciation (122,000) (100,000) Patent 74,000 - Total Assets $726,000 $553,000 Liabilities and Stockholders’ Equity Accounts Payable $36,000 $26,000 Interest Payable 13,000 8,000 Income Tax Payable 7,000 12,000 Bonds Payable 190,000 75,000 Common Stock 350,000 350,000 Retained Earnings 130,000 82,000 Total Liabilities and Stockholders’ Equity $726,000 $553,000 During 2019, $27,000 of cash dividends were declared and paid. A patent valued at $80,000 was obtained in exchange for land. Equipment that originally cost $20,000 and had $7,000 accumulated depreciation was sold for $13,000 cash. Bonds payable were sold for cash and cash was used to pay for structural improvements to the building. Required a. Compute the change in cash that occurred during 2019. b. Prepare a statement of cash flows using the indirect method. a. Change in Cash during 2019 $Answer Answer
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Statement of Cash Flows (Indirect Method)
The Madison Company’s income statement and comparative balance sheets as of December 31 of 2019 and 2018 follow:
| MADISON COMPANY Income Statement For the Year Ended December 31, 2019 |
||
|---|---|---|
| Sales Revenue | $825,000 | |
| Cost of Goods Sold | $530,000 | |
| Wages and Other Operating Expenses | 179,000 | |
| Depreciation Expense | 29,000 | |
| Patent Amortization Expense | 6,000 | |
| Interest Expense | 18,000 | |
| Income Tax Expense | 25,000 | |
| Gain on exchange of land for patent | (37,000) | 750,000 |
| Net Income | $75,000 |
| MADISON COMPANY Balance Sheets |
||
|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | |
| Assets | ||
| Cash | $67,000 | $25,000 |
| Accounts Receivable | 64,000 | 49,000 |
| Inventory | 85,000 | 66,000 |
| Land | 117,000 | 160,000 |
| Building and Equipment | 441,000 | 353,000 |
| (122,000) | (100,000) | |
| Patent | 74,000 | - |
| Total Assets | $726,000 | $553,000 |
| Liabilities and |
||
| Accounts Payable | $36,000 | $26,000 |
| Interest Payable | 13,000 | 8,000 |
| Income Tax Payable | 7,000 | 12,000 |
| Bonds Payable | 190,000 | 75,000 |
| Common Stock | 350,000 | 350,000 |
| Retained Earnings | 130,000 | 82,000 |
| Total Liabilities and Stockholders’ Equity | $726,000 | $553,000 |
During 2019, $27,000 of cash dividends were declared and paid. A patent valued at $80,000 was obtained in exchange for land. Equipment that originally cost $20,000 and had $7,000 accumulated depreciation was sold for $13,000 cash. Bonds payable were sold for cash and cash was used to pay for structural improvements to the building.
Required
a. Compute the change in cash that occurred during 2019.
b. Prepare a statement of cash flows using the indirect method.
a. Change in Cash during 2019 $Answer
Answer
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