Question

Mary Wong, the sole shareholder and manager of Kitchenware Inc., has approached you and asked you to prepare a statement of cash flows for her company. The company sells kitchen utensils that are used in most households. Mary is worried about the meeting that she has scheduled in two weeks with a lending officer of her bank. It is time for a review of the company’s loan from the bank.
Mary provided you with the following condensed financial statements for the fiscal years ended December 31, 2013 and 2014. She assures you that the financial statements are free of any omissions or misstatements, and that they conform to IFRS.
Additional information is as follows:
a. During 2014, the company sold old furniture with an original cost of $ 5,000 and $ 3,200 of accumulated depreciation up to the date of sale.
b. During 2014, the company sold one of the non- current investments that had cost $ 1,000. The gain on this sale is reported on the statement of earnings.
c. The company considers short- term investments as cash equivalents.
Required:
1. Prepare a partial statement of cash flows for Kitchenware Inc. showing the operating activities section for the year ended December 31, 2014. The company uses the indirect method to report cash flows from operations.
2. Compute the following amounts:
a. Cash collected from customers, assuming that 90 percent of the sales are on credit.
b. Cash paid to trade suppliers of merchandise.
c. Cash received for sale of old furniture.
3. Prepare the investing activities section of the statement of cash flows for Kitchenware Inc. for the year ended December 31, 2014.
4. Compute and explain (a) the quality of earnings ratio, and (b) free cash flow.
5. In an effort to improve the company’s financial performance, Mary proposed that the furniture and fixtures be depreciated over a longer period. This change will decrease depreciation expense by $ 2,000 in 2013 and by $ 4,000 in 2014. As a professional accountant, would this proposed change be acceptable to you? Explain.


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  • CreatedAugust 04, 2015
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