Question

QUESTION 1

Below are the financial statements of Purple Panther Ltd.

PURPLE PANTHER LTD
Statement of Financial Position
as at 31 December 2007
	2007		2006
Assets
Cash		72,000		31,200
Accounts receivable		43,200		33,600
Inventory		81,600		84,000
Plant	168,000		187,200
Less: Accumulated depreciation	(72,000)	96,000	(57,600)	129,600
Total Assets		292,800		278,400
Liabilities and Equity
Accounts payable		69,600		79,200
Income tax payable		36,000		48,000
Debentures payable		36,000		24,000
Share capital		72,000		60,000
Retained earnings		79,200		67,200
Total Liabilities and Equity		292,800		278,400

PURPLE PANTHER LTD
Statement of Profit or Loss
for the year ended 31 December 2007
Sales		600,000
Cost of sales		432,000
Gross profit		168,000
Selling expenses	60,000
Administrative expenses	45,600
Interest expense	4,800	110,400
Profit before income tax		57,600
Income tax expense		16,800
Profit		40,800

The following additional data was provided:

1. All operating expenses except depreciation are paid in cash.
2. Additional equipment was purchased for $16,800 cash.
3. Accounts payable pertains to inventory creditors.
4. Dividends of $28,800 were declared and paid.
5. All sales and purchases are on account.
6. During the year furniture was sold for $24,000 cash. This furniture originally cost $36,000 and had an accumulated depreciation of $12,000 at the time of sale.
7. All the depreciation expense, $26,400, is in the selling expense category.

Required:

1. Prepare a statement of cash flows for the year ended 31 December 2007 for Purple Panther Ltd, use the direct method for operating cash flows.

2. Peter Purple, the owner of the business, has come to you because he is confused about his current business situation. He asks you to explain to him how his cash from operations could be less than his profit for the year. Explain to Peter how this can be.

Answer 1

a.

PURPLE PANTHER LTD
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash flows from operating activities:
Cash received from customers	590400
Cash payments for inventory	-439200
Cash payments for operating expenses	-79200
Cash payments for interest	-4800
Cash payments for income taxes	-28800
Net cash flow from operating activities		38400
Cash flows from investing activities:
Cash paid for purchase of equipment	-16800
Cash received from sale of furniture	24000
Net cash flow used for investing activities		7200
Cash flows from financing activities:
Cash received from sale of common stock	12000
Cash received from issue of debentures	12000
Cash paid for dividends	-28800
Net cash flow from financing activities		-4800
Change in cash		40800
Cash at the beginning of the year		31200
Cash at the end of the year		72000

Working:

Cash received from customers
Sales Revenue	600000
Less: Increase in Accounts Receivable	-9600
	590400
Cash payments for inventory
Cost of sales	432000
Less: Decrease in Inventory	-2400
Add: Decrease in Accounts Payable	9600
	439200
Cash payments for operating expenses
Selling expenses	60000
Less: Depreciation	-26400
Administrative expenses	45600
	79200
Cash payments for income tax
Income tax expense	16800
Add: Decrease in Income tax payable	12000
	28800

b.  The cash from operations is less than the profit due to several reasons which are shown below by way of a reconciliation between the two amounts.

Net profit $		40800
Uncollected sales	-9600
Non-cash expense of depreciation	26400
Payments in excess of expense:
For Income tax	-12000
For inventory	-7200	-2400
Cash from operations $		38400