Question

Classic Automobiles of Huntsville Ltd. was formed on January 1, 2016 when Classic issued common shares for $300,000. Early in January 2016, Classic made the following cash payments:

· $150,000 for equipment

· $120,000 for inventory (four cars at $30,000 each)

· $20,000 for 2016 rent on a store building

In February 2016, Classic purchased six cars for inventory on account. Cost of this inventory was $240,000 ($40,000.00 each). Before year-end, Classic paid $200,000 of this debt. Classic uses the FIFO method to account for inventory.

During 2016, Classic sold eight vintage autos for a total of $500,000. Before year-end, Classic collected 80% of this amount.

The business employs three people. The combined annual payroll is $95,000, of which Classic owes $4,000 at year-end. At the end of the year, Classic paid an income tax of $10,000.

Late in 2016, Classic declared and paid cash dividends of $11,000.

For equipment, Classic uses the straight-line depreciation method over five years with zero residual value.

1. Prepare Classic Automobiles of Huntsville Ltd.’s income statement for the year ended December 31, 2016.

2. Prepare Classic’s balance sheet on December 31, 2016.

3. Prepare Classic’s statement of cash flows for the year ended December 31, 2016. Format cash flows from operating activities by using the indirect method.

4. Comment on the business performance based on the statement of cash flows.

Answer 1

Huntsville Ltd.
Income statement
For the year ended December 31, 2016.
	$	$
Sales		500,000
Cost of goods sold		280,000
Gross Profit		220,000
Operating Expenses
Depreciation	30,000
Rent	20,000
Salary Expenses	95,000
Dividend	11,000
Total Expenses		156,000
Net income before taxes		64,000
Income Tax		10,000
Net income after taxes		54,000

Huntsville Ltd.
Balance sheet
As on December 31, 2016.
	$	$
ASSETS
Non-Current Assets
Equipment	120,000
Total Non current assets		120,000
Current Assets
Inventory	80,000
Accounts Receivable	100,000
Cash	98,000
Total Current assets		278,000
Total Assets		398,000
EQUITY AND LIABILITIES
Equity	300,000
Retained earnings	54,000
Total Equity		354,000
Liabilities
Accounts Payable	40,000
Outstanding Salary	4,000
Total Liabilities		44,000
Total equity and Liabilities		398,000

Huntsville Ltd.
Statement of cash flows
For the year ended December 31, 2016.
	$	$
Cash Flow from Operating activities
Net income		54,000
Add: Adjustments to Net income
Depreciation	30,000
Dividend paid	11,000
Net income after adjustments		95,000
Changes in Working Capital
Increase in Inventory	(80,000)
Increase in Accounts Receivable	(100,000)
Increase in Accounts Payable	40,000
Increase in Outstanding Salary	4,000
Net cash used in operating activities		(41,000)
Cash Flow from (used in) Investing activities
Equipment purchased	(150,000)
Cash Flow used in Investing activities		(1,50,000)
Cash Flow from (used in) Financing activities
Equity shares issued	300,000
Dividend paid	(11,000)
Cash Flow from Financing activities		289,000

Working Note:

Statement showing calculations:

Particulars	Calculation	Amount ($)
Cost of goods sold	4 cars x $ 30,000 + 4 cars x $ 40,000	280,000
Inventory	2 cars x $ 40,000	80,000
Depreciation on equipment	$ 150,000/5	30,000
Carrying amount of equipment	$ 150,000 - $ 30,000	120,000
Accounts Payable	$ 240,000 - $ 200,000	40,000
Accounts Receivable	$ 500,000 – 80% of $ 500,000	100,000

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