Question

John Delivery services Ltd. Is a company dedicated to the delivery of merchandises purchased online

The company started the year 2019 with a total fleet of 5 cars purchased on 1^st of January 2018 for a total amount of € 100,000 and 3 trucks purchased on 1^st of January 2017 for a total amount of 180,000€. All cars have an estimated useful life of 5 years whereas trucks have an estimated useful life of 6 years. All vehicles have a salvage value of 10% of its cost. The depreciation method is the straight line method.

At 1^st of January 2019 the accountant of the company realized that the useful life of the trucks should be lowered to 5 years in total taking into account the intensive use made of the vehicles.

In order to be able to respond to the dramatic increase of job orders from the main clients, the company decides on 1^st of March to acquire 10 new trucks for a total amount of € 500.000. The trucks will have a useful life of 5 years, and an estimated salvage value of 10%. The accountant of the company decided that regarding these last trucks purchased, the depreciation method should be the 200% declining balance method.

To finance this acquisition, the company will issue 50.000 preferred stocks with €10 par value and 11% dividend rate.

At 1^st of January 2019, the owner’s equity section of the balance sheet of the company was composed as follows:

• Common stock: 100,000 shares of 1 € par value common stock
• Additional paid in Capital Common stock: € 150.000
• Retained earnings: €50.000

The 1^st of April 2019, a tornado destroyed part of the company’s facilities, causing a total loss of € 57.000

On 1^st of June 2019, John, a shareholder of the company decided to sale his 10% stake into the company. The company proceeded to the purchase of its own shares at a price per share of €10, a price 4 € above the market price.

To finance this purchase the company took a 6% loan of €100,000. Interests are payable once a year every 1^st of June

During year 2019, the remaining expenses of the company were the following:

Labor costs:

• 26 drivers with an average salary of €2.100 / month. 12 of said drivers where hired on 1^st of March 2019 , plus 30% social security taxes payable the 15 first days following each month
• 1 Manager with a gross fixed salary of €60.000 / year plus 30% social security taxes payable the 15 first days following each month, and a bonus of 5% of the net income of the previous year.
• 3 mechanics with an average salary of €1.850 / month

Gasoline expense: € 350,000, all paid cash

Insurance expense: €20,000 per month payable the first day of every quarter

Depreciation expense (facilities): € 42.000

Miscellaneous: € 146,000 paid cash

During the year 2019 the sales of the company amounted to €1,653,000. Consider that 9% of the company’s sales remain unpaid at 31^st of December 2019

Income tax is payable each month of February at 25% rate on the net income of the previous year.

The company began the year 2019 with a cash balance of €125,000

Net Income of year 2018 was €160,000

Prior to the stockholders meeting, John who owns 40% of the capital of the company comes to ask you about how the different issues commented above may affect the profitability of his investment into the company

1. I need a detailed statement of cash flow for the year 2019 using the direct method and to calculate the cash balance.

Answer 1

Cash Ledger

Date	Description	Amount		Date	Description	Amount
				Mar,1st	Truck	500000
Jan, 1st	Balance	125000
Mar, 1st	Preferred Stock	500000		Jun, 1st	Repurchase of Shares	100000
	( 50000 shares X 10/shares)				( 10000 shares X 10/ shares )
Jun , 1st	Bank Loan	100000			Expenses
	Sales	1504230			- Drivers Salary
	[1653000 X (100 - 9 /100 ) ]				[ ( 14 X 2100 X 12 ) + ( 12 X 2100 X 10)]	604800
					- Managers Salary	60000
					- Managers Bonus ( 160000 X 5/100 )	8000
					- Mechanics Salary ( 3 X 1850 X 12 )	66600
					- Gasoline Expense	350000
					- Insureance Expense (20000 X 4)	80000
					- Miscellneous Expenses	146000
					- Social Security Taxes Drivers	165060
					( 550200 X 30/100 )
					- Social Security Taxes Managers	16500
					( 60000 - 5000 )X 30/100
					- Income Taxes Paid	40000
					( 160000 X 25/100 )
					- Dividend Payment (500000 X 11/100)	55000
					Balance	37270
		2229230				2229230

Notes

1)

Fleet of cars and trucks purchased in 2017 and 2018 are not to be considered in the year 2019. Cause these transactions are not of this year.

2) Depriciation for the year 2019 is not to be considered for cash ledger and cashflow statement as this is a non-cash expense.

3) 12 drivers are hired on 1st march. So (26-12) = 14 drivers will get 12 months salary and 12 drivers will get 10 months salary.

4) Social serurity tax for drivers is paid in the following month. So the social security tax for the derivers and manager for the month of December 2019 will be paid on january 2020. So the social security tax will be paid in 2019 for 11 months only. There is no information is given for the month of Decmeber, 2018. Thats why no adjustment made in the cash ledger for this amount.

5) Interest on loan is outstanding as the interest will be paid in june, 2020.

6) Mangers bonus will be the 5% of income for the year 2018 which is 160000 pounds.

7) Tax paid during the year 2019 is 25% of income for the year 2018.

Cashflow Statement ( Direct Method )

for the year ended : 31st December, 2019

Description	Amount	Amount
Cashflow from Operating Activities
Cash Received from Debtors	1504230
Drivers Salary	(604800 )
Managers Salary	(60000)
Managers Bonus	(8000)
Mechanics Salary	(66600)
Gasoline Expense	(350000)
Insureance Expense	(80000)
Miscellneous Expense	(146000)
Cashflow from Operations	188830
Taxes Paid ( 165060 + 16500 + 40000)	(221560)
Net Cashflow from Operating Activities		(32730)
Cashflow From Investing Activities
Purchase Of Truck		(500000)
Cashflow From Financing Activities
Preferred Stock	500000
Bank Loan	100000
Repurchase Of Shares	(100000)
Dividend	(55000)
Cashflow from Financing Activities		445000
Net Cash Inflow / ( Outflow)		(87730)
Opening Cash Balance		125000
Closing Cash Balance		37270