Question

Question 1. The comparative statements of financial position of Kraco Inc. for 2018 and 2019 appear as follows. (100 points) 2018 2019 736,000 (104,000) Assets Buildings Less: Accumulated depreciation-Buildings Land Supplies Accounts receivable Cash Total 34,000 90,000 28,000 784,000 328,000 (32,000) 300,000 38,000 45,000 8,000 687,000 Equity and Liabilities Share capital-ordinary Retained earnings Bonds Payable Accounts payable Total 480,000 46,000 231,000 27,000 784,000 300,000 24,000 341,000 22,000 687,000 Below is given additional information related to revenues, expenses and dividends for year 2019. Sales revenue 350,000 Sales discounts 3,500 Gain from sale of Land 20,000 Cost of goods sold 220,000 Delivery expenses 10,000 Depreciation of Office Buildings 20,000 Advertising Expenses 2,500 Other Administrative expenses 6,750 Interest expense 6,000 Sales returns and allowances 32,500 Cash dividends paid on ordinary shares 33,000 Effective Tax Rate 20% Required a) Prepare an Income Statement for 2019. (See chapter 4) (30 points) b) Using information from the comparative Statements of Financial Position and Income Statement prepare a Statement of Cash Flows for 2019. (See Chapter 5) (50 points) c) Explain in your own words the reason for each adjustment you made to Net Income in the Operating Section of the Statement of Cash Flows. (20 points)

Answer 1

a) $350,000 $3,500 $32,500 $314,000 $220,000 $94,000 Kraco Inc. Income Statement For the Year Ended December 31st 2019 Sales Less: Sales discount Sales returns and allowances Net Sales Cost of goods sold Gross profit Operating expenses: Selling expenses Advertising expenses $2,500 Delivery expenses $10,000 Total selling expenses Administrative expenses Depreciation on Office buildings $20,000 Other administrative expenses $6,750 Total Administrative expenses Operating Income Add: Other income Gain on sale of land Income before interest and tax Interest expense Income before tax Income tax expense Net Income $12,500 $26,750 $54,750 $20,000 $74,750 $6,000 $68,750 $13,750 $55,000 b) Working notes: T- Accounts $55,000 Kraco Inc. Statement of Cash flows (Indirect method) For the Year Ended December 31, 2019 Cash flows from Operating Activities Net Profit Adjustments to reconcile net profit to net cash provided by Operating Activities Depreciation expense $72,000 Gain on sale of Land -$20,000 Change in operating current assets and liabilities Increase in Accounts receivable -$45,000 Decrease in supplies $4,000 Increase in Accounts payable $5,000 Opening balance Bank Buildings $328,000 $408,000 Closing balance $736,000 $736,000 $736,000 $16,000 $71,000 Accumulated Depreciation- Buildings Opening balance Closing balance $104,000 Depreciation $104,000 $32,000 $72,000 $104,000 $320,000 -$408,000 -$88,000 Net Cash from Operating Activities Cash flows from Investing Activities Sale of Land Purchase of Buildings Net Cash from Investing Activities Cash flows from Financing Activities Redemption of bonds payable Issuance of common stock Cash dividend paid Net Cash from Financing Activities Net increase (decrease) in cash Cash balance at beginning of the year Cash balance at end of the year Opening balance Profit and Loss A/C Land $300,000 $20,000 Bank $320,000 -$110,000 $180,000 -$33,000 $320,000 $320,000 $37,000 $20,000 $8,000 $28,000 c) The reason for adjustments to Net income: Depreciation is non cash expense Gain on sale of land is accounting gain Adjustments for current assets and liabilities It increase or decrease cash flows since these assets are operating assets Increase in current assets reduces the cash flow and decrease increases cash flow Increase in current liabilities increases the cash flow and decrease reduces the cash flow