Tangent Controls Ltd. is a manufacturer of crash-protected event recorders that are used in railway systems around the world to record event data. These data can be retrieved and analyzed to monitor and improve operations, but also to provide diagnostic data in the event of rail crashes. The small Ottawa-based company has customers across the world, but its largest market is North America. The company has been hurt by the U.S. economy, seeing a 12% decline in sales over the prior year. The company is hoping that the latest industry developments, which call for a significant increase in the shipment of oil by railcar, will mean an increase in sales. In the meantime, the company has been seeking new investors and has approached a leading Canadian venture capital firm to see if it might be interested in investing. As part of its approach, Tangent has provided the following financial information for the most recent fiscal year.

Additional information:

1. During the year, the company repaid principal of $30,000 on its loan payable.

2. During the year, equipment with a net carrying amount of $60,000 was sold.

3. No equipment was purchased during the year.

Required

a. You work for the venture capital firm and have been tasked with preparing the statement of cash flows for Tangent using either the direct or indirect method for determining cash flows from operating activities. Prepare the statement.

b. Discuss significant observations from the statement of cash flows that your firm would want to consider.

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TANGENT CONTROLS LTD. Statement of Financial Position As at September 30 2020 2019 Assets Current assets: Cash 24 72,000 Accounts receivable (net) 601,000 378,000 Inventory 760,000 594,000 Total current assets 1,361,000 1,044,000 Equipment 1,608,000 1,908,000 Accumulated depreciation, equipment (1,425,000) (1,440,000) $ 1,544,000 $ 1,512,000 Total assets Liabilities and shareholders' equity Current liabilities: Bank indebtedness 22,000 24 Accounts payable 260,000 252,000 Total current liabilities 282,000 252,000 144,000 Bank loan payable 152,000 Common shares 900,000 900,000 Retained earnings 210,000 216,000 Total liabilities and sharcholders' equity $ 1,544,000 $ 1,512,000 TANGENT CONTROLS LTD. Statement of Income For the year ended September 30, 2020 Sales revenue $6,070,000 Cost of goods sold 3,875,000 Gross profit 2,195,000 Wages expense 1,580,000 Utilities expense 290,000 Depreciation expense 225,000 Rent ex pense 79,000 Interest 47,000 expense TANGENT CONTROLS LTD. Statement of Income For the year ended September 30, 2020 Loss from operations Gain on sale of equipment Earnings before income tax Income tax expense Net income (26,000) 40,000 14,000 3,000 %24 11,000