Question

Question 3 – 14 marks

The following selected data for Potato Inc. for 2017 was gathered by its accountants, who are responsible for preparing the financial statements:

Cost of good sold                             $56,500

Amortization Expense                    14,000

Other operating expenses           17,700

Loss on sale of investments         1,500

Gain on sale of capital assets      8,500

Sales revenue                                    95,600

Interest revenue received            5,200

Dividend revenue received          2,500

Salary expense                                  27,200

Interest expense paid                     5,900

Income tax expense                        2,400

The cash balance on Jan. 1, 2017 has a balance of $15,000 and on Dec. 31, 2017, had a balance of $208,500

Other data gathered by the accountants for 2017:

Accounts receivable decreased                                  $13,600

Inventory increased                                                      6,800

Prepaid expenses decreased                                      2,700

Accounts payable increased                                         21,400

Salary payable increased                                               1,500

Accrued liabilities decreased                                       4,300

Income tax payable increased                                     800

Acquisition of capital assets                                        46,000

Issuance of common shares                                         80,000

Proceeds from sale of investments                           35,000

Collection of loan principal                                          22,600

Payment of dividend                                                      15,000

Proceeds of sale of capital assets                             31,700

Proceeds from sale of repurchase of shares          45,000

In good form prepare the statement of cash flow for the year ended December 31,2017 using the direct method.

Answer 1

1) CASH FLOW FROM OPERATING ACTIVITIES

PARTICULARS	AMOUNT
Cash receipts from customers	1,09,200
Cash paid to Suppliers	(41,900)
Cash paid to Employees	(25,700)
Cash Expenses	(1,600)
Cash Generated from Operations	40,000
Income Tax Paid	(1,600)
Net cash inflow from operating Activity (A)	38,400

2) CASH FLOW FROM INVESTING ACTIVITIES

PARTICULARS	AMOUNT
Proceed of sale of Capital Assets	31,700
Proceed from sale of Investments	35,000
Acquisition of capital Assets	(46,000)
Net cash inflow from Investing Activity (B)	20,700

3) CASH FLOW FROM FINANCING ACTIVITIES

PARTICULARS	AMOUNT
Proceeds from sale of repurchase of shares	45,000
Payment of dividend	(15,000)
Collection of loan principal	22,600
Issuance of common shares	80,000
Interest expense paid	(5,900)
Interest revenue received	5,200
Dividend revenue received	2,500
Net cash inflow from Financing Activity (C)	1,34,400

Net Increase in Cash & Cash Equivalents (A+B+C)	1,93,500
+ Cash and Cash Equivalents in the beginning	15,000
Cash and Cash Equivalent at the end	2,08,500

WORKING NOTES:-

1).Cash Receipts from Customers = Revenue from Operations + Decrease in Accounts receivable
= 95,600+13,600
   = 1,09,200

2). Cash paid to Suppliers =  Purchases - Increase in trade payables
=63,300 - 21,400
= 41,900
Purchases = Cost of goods sold + Increase in Inventory
= 56,500+6,800
= 63,300

3).Cash Paid to employees = Salary expenses - Increase in Salary Payable
= 27,200 - 1,500
= 25,700

4).Cash Expenses = Accrued liability decreases = 4,300 that means liability must be paid off that means reduction in cash
Prepaid expenses decreased = 2,700 A decrease in prepaid expenses results in an increase in cash flow.

That means cash expenses are 4,300-2,700 =1,600

5). Income tax paid = Income tax expenses - Increase in income tax liability
= 2,400 - 800
= 1,600

6). Other operating expenses are not taken here as it is a direct expense which is already included in cost of goods sold, so we have ignored the amount of 17,700/- in above calculations.
7).Gain on sale of capital assets of 8,500 is already included in procedd of sale of capital assets, that's why we have ignored that amount.
8). Loss on sale of investment of 1,500 is already included in proceeds from ale of investment that's why we have ignored that amount.
9). Amortization expenses of 14,000 is a non cash item so we have ignored this amount.