STATEMENT OF CASH FLOWS
4. Statement of Cash Flows: A summary of the cash receipts and cash payments for a
specific period of time, such as a month or a year.
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Question There are four transactions that affect Owner’s equity.
(a) What are the two types of transactions that increase Owner’s equity?
(b) What are the two types of transactions that decrease Owner’s equity?
Answer
(a) Owner investment and revenues
(b) Owner withdrawals and expenses
Question The assets and liabilities of S&P Day Spa at December 31, 2011 and its revenue and expenses for the year are listed below. The capital
of the owner was $68,000 at January 1, 2011. The owner invested an additional $10,000 during the year.
Accounts Payable
$4,375 Spa Operating Expense
$23,760
Accounts Receivable
$8,490 Office Expense
$2,470
Cash
$13,980 Spa Supplies
$9,230
Fees Earned
$98,435 Wages Expense
$26,580
Spa Furniture & Equipment
$56,000 Drawing
$38,170
Computers
$2,130
Prepare an income statement for the current year ended December 31, 2011.
Answer
S&P Day Spa
Income Statement
For the Year Ended December 31, 2011
Fees Earned
$98,435
Expenses:
Wages
Expense
$26,580
Spa
Operating
Expense
23,760
Office Expense
2,470
Total
Expenses
52,810
Net Income
$45,625
Prepare a statement of owner’s equity for the current year ended December 31, 2011.
Statement of Owner’s Equity
Owner capital, January 1, 2011
$68,000
Additional investment by owner during year
$10,000
Net Income for the year
45,625
Subtotal
$55,625
Less withdrawals
38,170
Increase in owner’s equity
17,455
Owner capital December 31, 2011
$85,455
Prepare a balance sheet for the year ended December 31, 2011.
Balance Sheet
December 31, 2011
Assets
Liabilities
Cash
$13,980 Accounts Payable
$ 4,375
Accounts Receivable
8,490
Spa Supplies
9,230
Computers
2,130
Owner’s Equity
Spa Furniture & Equipment
56,000 Owner Capital
85,455
Total Assets
$89,830
Total Liabilities and Owner’s Equity
$89,830
Cash received from customers
$57,360
Cash received from bank loan
15,000
Cash payments:
Cash paid for operating expenses
$12,120
Cash paid for equipment
18,070
Cash paid for party supplies
9,480
Drawing
12,000
The cash balance as of January 1, 2011
$15,580
Prepare a statement of cash flows for Lopez Wedding Planning for the year ended December 31, 2011.
Lopez Wedding Planning
Statement of Cash Flows
Cash flows from operating activities:
Deduct cash payments for expenses and supplies
(21,600)
Net cash flows from operating expenses
$35,760
Cash flows from investing activities:
Cash paid for equipment
(18,070)
Cash from financing activities:
Deduct cash withdrawals from owner
(12,000)
Net cash flows from financing activities
3,000
Net increase in cash during year
$ 20,690
Cash as of January 1, 2011
15,580
Cash as of December 31, 2011
$36,270
Question Explain the interrelationship between the Balance Sheet and the Statement of Cash Flows.
Answer
The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows.
Question The following data were taken from Harrison Company’s balance sheet:
Dec. 31, 2012 Dec. 31, 2011
Total liabilities $150,000 $105,000
Total owner’s equity 75,000 60,000
a. Compute the ratio of liabilities to owner’s equity.
b. Has the creditors’ risk increased or decreased from December 31, 2011, to December 31, 2012?
Answer
a. 12/31/2012: $150,000 / 75,000 = 2.0