LUNA Inc. pre-audit statement of income for the year ended December 31, 2020 is shown below: Sales P 2,964,000 Cost of goods sold 1,926,000 Gross income 1,038,000 Operating expenses Rent P250,000 Salaries 345,000 Utilities 219,000 Advertising 30,000 Warranty 14,000 Other expenses _ 35,500 893,500 Net income P 144,500 You obtained the following information from the company’s accounting records:
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.
LUNA Inc. pre-audit statement of income for the year ended December 31, 2020 is shown below:
Sales P 2,964,000
Cost of goods sold 1,926,000
Gross income 1,038,000
Operating expenses
Rent P250,000
Salaries 345,000
Utilities 219,000
Advertising 30,000
Warranty 14,000
Other expenses _ 35,500 893,500
Net income P 144,500
You obtained the following information from the company’s accounting records:
- Some of Luna's customers pay their orders in advance. At December 31, 2020, orders paid for in advance of shipment totalled P15,000. These have been included in the sales figure.
- Luna's products are sold with a 30-day money back guarantee. Customers seldom return the products
during the year. Luna has not included in the sales figure and in cost of goods sold those products sold
within the last 30 days of the current year. The revenue is P98,000 and the cost of the products is
P63,700.
3. On July 1, 2020, Luna prepaid its office rent for 18 months. The amount paid, P216,000 was recorded
as rent expense.
4. The amount of P120,000 was paid on July 1, 2020 for general advertising to be completed prior to
December 31, 2020. Luna's management believes that the advertising will benefit a 2-year period,
thus, has decided to charge the costs to the income statement at the rate of P5,000 per month.
5. In prior years, Luna has estimated warranty expense using percentage of sales. Future warranty costs
relating to 2020 sales are estimated to amount to 2% of sales. However, during 2020, Luna elected to
charge costs to warranty expense as costs were incurred. Luna spent P14,000 during 2020 to repair
and replace defective products sold in current and prior years.
Required:
1. prepaid advertising on December 31, 2020
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