For 20Y2, McDade Company reported a decline in net income. At the end of the year, T. Burrows, the president, is presented with the following condensed comparative income Statement: McDade CompanyComparative Income StatementFor the Years Ended December 31, 20Y2 and 20Y1 20Y2 20Y1 Sales.......................... $16,800,000 $15,000,000 Cost of goods sold.............. 11,500,000 10,000,000 Gross profit.................... $ 5,300,000 $ 5,000,000 Selling expenses............... $ 1,770,000 $ 1,500,000 Administrative expenses........ 1,220,000 $ 1,000,000 Total operating expenses....... $ 2,990,000 $ 2,500,000 Income from operations........ $ 2,310,000 $ 2,500,000 Other revenue................. 256,950 225,000 Income before income tax...... $ 2,566,950 $ 2,725,000 Income tax expense............ 1,413,000 1,500,000 Net income.................... $ 1,153,950 $ 1,225,0000 Instructions1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. Round percentages to one decimal place.2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).
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.
For 20Y2, McDade Company reported a decline in net income. At the end of the year, T. Burrows, the president, is presented with the following condensed comparative income Statement:
McDade Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
| 20Y2 | 20Y1 | |
| Sales.......................... | $16,800,000 | $15,000,000 |
| Cost of goods sold.............. | 11,500,000 | 10,000,000 |
| Gross profit.................... | $ 5,300,000 | $ 5,000,000 |
| Selling expenses............... | $ 1,770,000 | $ 1,500,000 |
| Administrative expenses........ | 1,220,000 | $ 1,000,000 |
| Total operating expenses....... | $ 2,990,000 | $ 2,500,000 |
| Income from operations........ | $ 2,310,000 | $ 2,500,000 |
| Other revenue................. | 256,950 | 225,000 |
| Income before income tax...... | $ 2,566,950 | $ 2,725,000 |
| Income tax expense............ | 1,413,000 | 1,500,000 |
| Net income.................... | $ 1,153,950 | $ 1,225,0000 |
Instructions
1. Prepare a comparative income statement with horizontal analysis for the
two-year period, using 20Y1 as the base year. Round percentages to one decimal place.
2. To the extent the data permit, comment on the significant relationships
revealed by the horizontal analysis prepared in (1).
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