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Question 3 (20 marks) Shown below are the comparative statement of financial position, income statement and statement of retained earnings for the year ended 31 December 2020. UPPER COMPANY Statement of Financial Position 31 December 2020 2019 2020 Assets Cash and cash equivalents $80,000 $17,000 Accounts receivable $50,000 $850,000 Inventory $40,000 $20,000 Investment in trading securities (1) $50,000 Property, plant and equipment (net of accumulated depreciation) (2) $600,000 $2,653,000 Totals $820,000 $3,540,000 Liabilities & Equity Notes payable (short-term) (2) Accounts payable Salary payable Interest payable Dividend payable Notes payable (long-term) (3) Share capital (4) Retained earnings Totals $30,000 $20,000 $25,000 $40,000 $390,000 $200,000 $115,000 $820,000 $1,550,000 $63,000 $12,000 $20,000 $20,000 $640,000 $700,000 $535,000 $3,540,000 UPPER COMPANY Retained Earnings Statement For the Year Ended 31 December 2020 $115,000 Retained earnings, 1 January 2020 Add: Net income Deduct: Dividends declared (5) Retained earnings, 31 December 2020 $440,000 $20,000 $420,000 $535,000 UPPER COMPANY INCOME STATEMENT For the Year Ended 31 December 2020 $1,697,900 $408,500 $1,289,400 $545,000 $215,000 Sales Cost of goods sold Gross profit Administrative expenses (6) Selling expenses Other income: Gain on sale of trading securities (1) Income from operations Interest expense Income before income taxes Income taxes Net income $760,000 $19,500 548,900 $14,000 $534,900 $94.900 $440,000 Notes (1) The trading securities held at 31 December 2019 were all sold during 2020. (2) Increase of short term notes payable represents short-term borrowing from bank. (3) There are additions of $2,200,000 to property, plant and equipment during 2020. They are partly financed by the issue of long term notes payable. No other long term notes payable are issued for other purpose. (4) The company has issued new shares for cash in 2020. (5) Dividend of $20,000 was declared on 1 December 2020, payable on 31 January 2021. (6) Included in administrative expenses are depreciation expense of $147,000. Required a) Prepare the statement of cash flow for the year ended 31 December 2020, using indirect method for the operating cash flow. (16 marks) b) Compute the accounts receivable turnover and times interest earned of Upper Company. (4 marks)

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