Question: Jeopardy Inc s CFO has just left the office of the

Jeopardy Inc.’s CFO has just left the office of the company president after a meeting about the draft balance sheet at April 30, 2011, and income statement for the year ended. (Both are reproduced below.) “Our liquidity position looks healthy,” the president had remarked. “Look at the current and acid-test ratios, and the amount of working capital we have. And between the goodwill writeoff and depreciation, we have almost $23 million of non-cash expenses. I don’t understand why you’ve been complaining about our cash situation.”
The CFO turns the draft financial statements over to you, the newest member of the accounting staff, along with extracts from the notes to the financial statements.
Consolidated Statement of Income and Retained Earnings
Year Ended April 30, 2011, and 2010
(in $000s)
*The operating and general and administrative expenses for 2011 include salaries and wages of $37,509 and $9,115, respectively.
Draft Notes to the Financial Statements
For the Year Ended April 30, 2011
Note 1. Investments
The company’s investments at April 30 are as follows (in $000s):
Note 2. Property, Plant, and Equipment
Additions to property, plant, and equipment for the current year amounted to $2,290,000. Proceeds from the disposal of property, plant, and equipment amounted to $250,000.
Note 3. Franchise Fees Franchise fees are amortized over the term of 10 years using the straight-line method.
Note 4. Accounts Payable and Accrued (in $000s)
Note 5. Long-Term Debt (in $000s)
Debentures bear interest at 12% per annum and are due in 2011. Bank term loans bear interest at 8% and the bank advanced $2.2 million during the year.
Note 6. Share Capital On September 14, 2010, Jeopardy Inc. issued 3.8 million shares with special warrants. Net proceeds from issuing 3.8 million shares amounted to $14,393,000. Net proceeds from issuing 3.8 million warrants amounted to $899,000. On April 30, 2011, a stock dividend of $1 million was issued.
Based on the assumption that Jeopardy Inc. follows ASPE:
(a) Prepare a statement of cash flows for the year ended April 30, 2011, on a non-comparative basis from the information provided. The CFO wants to use the direct method to report the company’s operating cash flows this year. Include all required disclosures.
(b) Prepare a reconciliation of the 2011 net loss to cash provided from (used in) operations. This reconciliation is to be included in a note to the financial statements.
(c) Write a memo to the president of Jeopardy Inc. that explains why the company is experiencing a cash crunch when its liquidity ratios look acceptable and it has significant non-cash expenses.
(CICA adapted)

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