Question
Don and Dale are in the retail business. They named their business: D & D Company. During 2020, they engaged a part-time bookkeeper who has
Don and Dale are in the retail business. They named their business: D & D Company. During 2020, they engaged a part-time bookkeeper who has limited accounting knowledge to keep records of their business transactions. The bookkeeper has drawn up the following statements of cash flows for their business for the year ended 31 December 2020.
Question:
(a) The bookkeeper has not drawn up the income statement for the year ended 2020. The only non-cash items in the income statement are depreciation, the gain from the sale of investments and certain items highlighted in the additional information. Prepare an income statement for 2020 to determine the amount of net income or loss (ignore income taxes).
(b) Using the data provided and the income statement from (a), prepare a statement of cash flows in proper form using the indirect method including a supplemental statement for non-cash investing and financing transactions.
(c) Do you agree with Don and Dale? Explain your position.
D & D Company Statement of Cash Flows For the year ended 31 December 2020 Sources of cash From sales of merchandise 480,000 From sale of ordinary shares 420.000 From sale of investments (purchased below) 82,000 From depreciation 53,000 From issuance of note for truck 20,000 From interest on investments 6,000 Total sources of cash 1.061.000 Uses of cash For purchase of plant assets 340,000 For merchandise purchased for resale 280,000 For operating expenses (including depreciation) 160,000 For purchase of investments 77,000 For purchase of truck by issuance of note 20,000 For purchase of treasury shares 10,000 For interest on notes payable 2,000 Total uses of cash 889.000 Net increase in cash 172,000 The statement of cash flows portrayed a superb first year with cash increasing $172,000. However, Done and Dale thought that the statement is presented incorrectly, and that $172,000 is not the actual increase in cash. They thought that the following additional information should also be considered when preparing the statement of cash flows for the year ended 31 December 2020. Additional Information 1. The cash balance at the beginning of the year was $140,000. 2.5% of the sales of merchandise of S480,000 have yet to be collected from customers. 3. The company has not paid for 10% of the $280,000 of merchandise purchased for resale. 4. Merchandise purchased for resale were all sold during 2020Step by Step Solution
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