Barkway Inc. (Barkway) is in the process of finalizing its cash flow statement for 2018. The statement has been completely prepared except for the new product development costs that the controller hasn't decided how to account for. The controller has been examining IAS 38 on intangible assets and realizes that considerable judgment is needed in accounting for product development costs. The controller's interpretation of the facts suggests that capitalizing or expensing the development costs could be supported. Preliminary net income, before accounting for the development costs, is $242,500. The product development costs for the year are $205,000. Barkway's preliminary cash flow statement is shown below (the product development costs aren't reflected in the cash flow statement):

Required:

a. Complete the cash flow statement (shaded boxes) assuming that

i. The new product development costs are capitalized and amortized; assume that if the product development costs are capitalized, it isn't necessary to depreciate any of the costs in 2018.

ii. The new product development costs are expensed as incurred

b. Compare the two cash flow statements. How do they influence your evaluation of Barkway?

c. How are the balance sheet and income statement affected by the different accounting treatments for the new product development costs?

d. If Barkway's management received bonuses based on net income, which treatment for the product development costs do you think they would prefer? Explain.

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Barkway Inc. Cash Flow Statement for the Year Ended August 31, 2018 Cash from operations Net income Add: Depreciation Add: Net decrease in non-cash working capital 92,500 52,500 Add: Loss on sale of capital assets 87,500 Cash from operations Investing activities Proceeds from the sale of capital assets 122,500 Purchase of capital assets (245,000) Cash from (used for) investing activities Financing activities Increase in long-term debt 187,500 Repayment of mortgage loan Dividends (62,500) (25,000) Cash from (used for) financing activities Change in cash during 2018 Cash and equivalents, beginning of the year 55,000 Cash and equivalents, end of the year