Question

The comparative statement of financial positions and statement of profit or loss of Karvina Electronics Limited are as follows:

Karvina Electronics Limited

Statement of financial positions /Balance Sheets At 31 December 2017

2017               2016   

$                 $

Assets:

Cash                                                                                       107,267          123,040

Accounts receivable                                                               32,180            29,400

Merchandise inventory                                                          383,125          61,710

Long-term investments                                                          55,900            56,400

Equipment                                                                              275,500          145,500

Accumulated depreciation                                                     (33,550)          (31,200)

Total assets                                                                             820,422          384,850

Liabilities:

Accounts payable                                                                   56,827            40,380

Income taxes payable                                                             10,725            10,200

Bonds payable                                                                       48,750            66,000

Total liabilities                                                                        116,302          116,580

Equity:

Ordinary shares                                                                      130,000          105,000

Retained earnings                                                                  574,120          163,270

Total equity                                                                            704,120          268,270

Total liabilities and equity                                                      820,422          384,850

Karvina Electronic Limited

Statement of profit or loss and other comprehensive income

For Year Ended 31 December 2017

Sales                                                                                                               890,000

Cost of goods sold 180,900

Depreciation expense (equipment)                                         29,400

Other operating expenses                                                       48,000

Interest expense                                                                     2,000              (260,300)

Other gains (losses):

Loss on sale of equipment                                                                             (8,400)

Income before taxes                                                                                       621,300

Income taxes expense                                                                                    (27,650)

Net income                                                                                                     593,650

Additional information:

1 There was no gain or loss on the sales of the long-term investments, nor on the bonds retired.

2 Old equipment with an original cost of $37,550 was sold with a loss.

3 Additional ordinary shares were issued for cash.

Required:

a To prepare a statement of cash flows for the company for the year ended 31 December 2017 using the direct method. (Reconciliation by indirect method is not required.)

b Briefly explain why the net income of the company was positive but the cash flows of the company decreased in 2017.

Answer 1

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Cash Flow
Cash Received from Customers	Working-1	$         887,220
Cash paid to vendors	Working-2	$       -485,868
Cash Paid for Income Tax	Working-3	$          -27,125
Payment of Operating Expense		$          -48,000
Payment of Interest		$            -2,000
Net Cash flow from Operating Activities		$         324,227
Cash flow from Investing activities:
Sale of Investment		$                 500
Sale of Equipment	Working-4	$              2,100
Purchase of Equipment	Working-4	$       -167,550
Net Cash from Investing Activities		$       -164,950
Cash flow from financing activities:
Retiring the Bond	48750-66000	$          -17,250
Issue of Ordinary Share		$           25,000
Payment of Dividend	Working-5	$       -182,800
Net Cash from Financing Activities		$       -175,050
Net Increase in Cash		$          -15,773
Add: Beginning Balance		$         123,040
Ending Balance		$         107,267
Working-1
Beginning Receivable	$                                 29,400
Add: Sale	$                               890,000
Less; Ending Receivable	$                                -32,180
Cash Received from Customers	$                               887,220
Working-2
Cost of Goods Sold	$                               180,900
Less:Beginning Inventory	$                                -61,710
Add: Ending Inventory	$                               383,125
Purchases	$                               502,315
Beginign Payable	$                                 40,380
Add: Purchase	$                               502,315
Less: Ending Payable	$                                -56,827
Cash paid to vendors	$                               485,868
Working-2
Beginning Income Tax Payable	$                                 10,200
Add: Income Tax Expense	$                                 27,650
Less: Ending Inventory	$                                -10,725
Cash Paid for Income Tax	$                                 27,125
Working-4
Beginning Equipment	$                               145,500
Less: Sale of Equipment	$                                -37,550
Balance of Equipment	$                               107,950
Less: Ending Equipment	$                               275,500
Purchase of Equipment	$                               167,550
Beginning, Acc Dep	$                                -31,200
Add: Expense of the year	$                                -29,400
Less: Ending Acc Dep	$                                 33,550
Dep of Sold Equipment	$                                -27,050
Cost of Sold Equiipment	$                                 37,550
Less: Acc Dep	$                                -27,050
Book Value	$                                 10,500
Less: Loss	$                                  -8,400
Sale Value	$                                    2,100
Working-5
Beginning Retained Earning	$                               163,270
Add: Net Income	$                               593,650
Less: Ending Retained Earning	$                             -574,120
Dividend Paid	$                               182,800