Question 2 (60 marks)

Financial statements and notes for Knutsford Corporation are below:

Knutsford Corporation Statement of Financial Position December 31, Year 8
	Year 8	Year 7
Cash	$ 82,000	$ 8,000
Accounts receivable	348,000	271,000
Prepaid insurance	16,000	35,000
Inventory	398,000	350,000
Supplies	13,000	17,000
Investment FVNI (6)	818,000	800,000
Land (1)	640,000	500,000
Buildings (2)	1,310,000	1,280,000
Accumulated depreciation, buildings	(400,000)	(360,000)
Equipment (3)	632,000	640,000
Accumulated depreciation, equipment	(160,000)	(135,000)
Patent (net)	60,000	65,000
	$ 3,757,000	$ 3,471,000
Accounts payable	$ 165,000	$ 150,000
Income tax payable	26,000	35,000
Accrued liabilities	57,000	41,000
Dividends payable	20,000	50,000
Notes payable (long term)	420,000	460,000
Bonds payable (7)	999,000	995,000
Preferred shares (1)	486,000	380,000
Common shares	1,146,000	1,066,000
Retained earnings (5)	438,000	294,000
	$ 3,757,000	$ 3,471,000

Knutsford Corporation Income Statement Year Ended December 31, Year 8
Revenues
Sales revenue		$ 999,000
Investment income (6)		90,000
		1,089,000
Expenses and losses
Cost of goods sold	$ 314,000
Selling expense (commissions)	108,000
Operating expenses (4)	166,000
Salaries expense	104,000
Interest expense	95,000
Loss on disposal of equipment	11,000
Income tax expense	96,000
Total expenses		894,000
Net income		$ 195,000

1. During Year 8, Knutsford Corporation exchanged preferred shares for land valued at $100,000. It also purchased a second tract of land for cash. During the year, convertible preferred shares with a book value of $18,000 were exchanged for common shares.

2. One building was purchased during the year.

3. Equipment with a cost of $46,000 and accumulated depreciation of $32,000 was sold. Knutsford also purchased equipment.

4. Depreciation and amortization are included in operating expenses.

5. Dividends were paid.

6. Investment income includes dividend, interest, and gains. This includes an $18,000 unrealized gain.

7. The increase in bonds payable represents bond discount amortization for the year.

Instructions

1. Prepare a statement of cash flows for Year 8 using the indirect method.

2. Prepare the operating activities section of the statement of cash flows for Year 8 using the direct method.