Question

Envoi was formed on January 1, 2016, when Envoi issued common shares for $500,000. Early in January 2016, Envoi made the following cash payments:

$250,000 for equipment

$200,000 for inventory (four cars at $50,000 each)

$10,000 for 2016 rent on a store building

In February 2016, Envoi purchased six cars for inventory on account. Cost of this inventory was $260,000 ($43,333.33 each). Before year-end, Envoi paid $208,000 of this debt. Envoi uses the FIFO method to account for inventory.

During 2016, Envoi sold eight vintage autos for a total of $600,000. Before year-end, Envoi collected 80% of this amount.

The business employs three people. The combined annual payroll is $55,000, of which Envoi owes $4,000 at year end. At the end of the year, Envoi paid income tax of $10,000.

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

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

Requirements

Prepare Envoi’s income statement for the year ended December 31, 2016. Use the single-step format, with all revenues listed together and all expenses listed together.

Prepare Envoi’s balance sheet at December 31, 2016.

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

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

Answer 1

1.)	Envoi
	Income Statement
	Year Ended December 31,2016
		Amount in $
	Revenue:
	Sales Revenue	600,000
	Expenses:
	Cost of Goods sold ( 50,000 x 4 ) + ( 43,333.33 x 4 )	373,333
	Salary Expense	55,000
	Depreciation expense (250,000 / 5 )	50,000
	Rent Expense	10,000
	Income Tax Expense	10,000
	Net Income (loss)	101,667
2.)	Envoi Balance Sheet at December 31,2016
	Assets	Amount in $
	Non-current assets
	Equipment , Net of Depreciation (250,000 - 50,000 )	200,000
	Current assets
	Cash (500,000 - 250,000 - 200,000 - 10,000 - 208,000 - 51,000 - 10,000 - 11,000 + ( 600,000 x 80% )	240,000
	Accounts Receivables (600,000 x 20% )	120,000
	Inventory ( 200,000 + 260,000 - 373,333 )	86,667
	Total Assets	646,667
	Equity & Liabilities
	Equity
	Common Shares	500,000
	Retained Earnings ( 101,667 - 11,000 )	90,667
	Current Liabilities
	Accounts Payable (260,000 - 208,000 )	52,000
	Salaries Payable	4,000
	Total Equity & Liabilities	646,667
3.)	Envoi Statement of Cash Flow ( Indirect Method)
	Particulars	Amount in $
	Cash flows from operating activities
	Net income	101,667
	Adjustments to arrive cash flow from operating activities:
	Depreciation expense	50,000
	Increase in accounts receivables	-120,000
	Increase in inventory	-86,667
	Increase in salaries payable	4,000
	Increase in accounts payable	52,000
	Net Cash flow from operating activities	1,000
	Cash flows from investing activities
	Purchase of Equipment	-250,000
	Net Cash flow from (used in ) Investing activities	-250,000
	Cash flows from financing activities
	Proceeds from issue of common shares	500,000
	Dividend paid	-11,000
	Net Cash flows from financing activities	489,000
	Net increase(decrease) in cash and cash equivalents (A)	240,000
	Cash and cash equivalents at beginning of period (B)	-
	Cash and cash equivalents at end of period =A+B	240,000
4.)	The Envoi has generated net cash flow of $ 240,000 during the year after Investing $ 250,000 in Purchase of equipment. Although it has raised $ 500,000 through issue of common shares. We can still conclude that Envoi has positive cash flow for the year 2016 and sufficient liquidity.