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:
- All operating expenses except depreciation are paid incash.
- Additional equipment was purchased for $16,800 cash.
- Accounts payable pertains to inventory creditors.
- Dividends of $28,800 were declared and paid.
- All sales and purchases are on account.
- During the year furniture was sold for $24,000 cash. Thisfurniture originally cost $36,000 and had an accumulateddepreciation of $12,000 at the time of sale.
- All the depreciation expense, $26,400, is in the sellingexpense category.
Required:
- Prepare a statement of cash flows for the year ended 31December 2007 for Purple Panther Ltd, use the direct method foroperating cash flows.
- Peter Purple, the owner of the business, has come to youbecause he is confused about his current business situation. Heasks you to explain to him how his cash from operations could beless than his profit for the year. Explain to Peter how this canbe.
