Question

The beverage store ended the month of Aug '19 with the following data:

Data Table Payments of cash Acquisition of equipment . . . . . . . .. $ 207,000 Cash balance, August 1, 2019. . . . . . . . . .$ 2,500 Cash balance, August 31, 2019 5,400 Retained earnings August 1, 2019 Retained earnings August 31, 2019 Cash receipts 22,800 1,600 22,800 207,000 7,500 8,700 276,200 0 Issuance (sale) of stock to owners .. .. Rent expense Adjustments to reconcile net income to net cash provided by operations 78,400 Service revenue

Prepare the statement of cash flows. Begin by completing the heading. Then complete the rest of the statement. (Use parentheses or a minus sign to show cash payments, cash outflows, and/or a net decrease in cash. For accounts with a $0 balance, make sure to enter "0" in the appropriate cell.)

Answer 1

Solution :-

(a). Cash Flow Statement -

(b). Relationship among Income statement, Balance sheet, Statement of retained earnings, Balance sheet, and Statement of Cash flows -

There are four basic financial statements namely -

1. Income statement

2. Statement of Retained Earnings

3. Balance sheet

4. Statement of Cash flows

1. Income statement - The objective of income statement is to display the details of items of income & expenditure which have contributed in making the profit or loss. Profit or loss arrived is disclosed in the income statement which is prepared at the close of the accounting period. The income statement discloses the net profit of the business entity for the accounting period after adjusting the income earned & matching expenses incurred during the accounting period. It is basically sub divided into two parts for a Non Manufacturing companies namely (i). Trading account (ii). Profit and Loss account. For Manufacturing companies a separate Manufacturing account which is also a part of income statement is also prepared in addition to the above stated Trading account and Profit and Loss account.

2. Statement of Retained Earnings - It depicts the changes in the owners equity during the accounting period. It generally includes changes in the share capital, accumulated reserves & retained earnings which belong to the owners.

3. Balance Sheet - Balance sheet is a statement which reflects the assets and liabilities of the business enterprise as at a certain date. Generally the balances of all the personal accounts, real accounts & some nominal accounts which are deferred to transfer to Profit and Loss account are shown on a sheet known as Balance Sheet. It is divided into two parts (i). Liabilities are shown on the left hand side of the of the balance sheet & (ii). Assets on the right hand side of the balance sheet.   

4. Statement of Cash flows - A cash flow statement is a statement which shows inflows & outflows of cash and cash equivalents during the accounting period. It generally shows the sources of receipt of cash & cash equivalents and the purpose for which their payments are made. Its is classified in three categories (i). Operating Activities - It depicts the cash inflows and outflows which are related to main revenue earning activities of the business entity. (ii). Investing activities - It is related to cash investment in and sale of the fixed assets & investment in shares & securities of the business entity. (iii). Financing Activities - It relates to cash funds obtained from raising capital or short term or long term borrowings and repayments of capital & borrowings by the business entity.

Each of the above items are interrelated in the sense that Income statement is linked to Balance sheet, statement of Cash flows and retained earnings. Income earned during the accounting period is added with retained earnings in the balance sheet. Cash at the end of the accounting period is shown in the balance sheet under the heading Current Assets. The connection of financial statements can also be explained with the help of accounting equation -

Capital + Net Profit (Income/Profits - Expenses/Losses) + Long term liabilities + Short term liabilities = Fixed Assets + Current Assets

(c).

Net income on the statement of retained earnings comes directly from the Income Statement.

Ending retained earnings on the Balance Sheet comes directly from the Statement of Retained Earnings.

Ending Cash on the Statement of Cash Flows is reported on the Balance Sheet.