Doug and Debbie Smith have held jobs in a variety of businesses since they have been together.Doug has been a sales representative manager for a pharmaceutical company. Debbie has been a legal assistant at a law firm. They both wanted to always own their own business. They have decided to open a jewelry store here in Virginia Beach, Virginia. They will call the jewelry store Heavenly Rocks. They have been saving up for years to do this and want to branch out on their own now. Here is financial information on the jewelry store as they want your help because you just finished your MBA.

On January 1, Heavenly Rocks issued no par common stock to the Smiths for $500,000. Early in January, Doug secured a commercial space for $24,000 for Heavenly Rocks. Then the business purchased store fixtures for $54,000. Then the business purchased a vast amount of different types of jewelry. They bought watches, stones, necklaces, bracelets, etc. The total inventory costs was $270,000. Sales were pretty good so a few months later the business purchased additional inventory on account of $244,000. Before the year ended Heavenly Rocks paid $144,000 of this accounts payable. During the year, Heavenly Rocks sold 2,300 pieces of various jewelry and the average sale was $225. Before the year ended the company collected on 90% of this sales amount. The costs of goods sold for the year totaled $320,000 and the year-end inventory amount was $194,000.

Heavenly Rocks employed three employees and did not pay any overtime throughout the year. The total payroll for the year was $88,000 but Heavenly Rocks still owes the employees $6,000 at year end. At the end of the year, Heavenly has paid in income tax of $20,000 so there is no reason to have an income tax payable account. The Smiths believed they had a rewarding year as they started their own jewelry business. The Smiths sacrificed a lot during this first year but did need some money to live on so they took dividends of $35,000 from Heavenly Rocks. The Smiths do not know that much about accounting so they asked a friend for advice on how to account for the use of the store fixtures. They want the store fixtures depreciated over 5 years using the straight-line depreciation method with zero residual value.

Please answer the following questions among your group members and submit one group answer by the due date.

1. What is the purpose of the statement of cash flows?

1. Prepare the income statement for the year ended.

1. Prepare the balance sheet for the company at year end.

1. Prepare the statement of cash flows at year end using the indirect method.

1. Analyze the three financial statements from your answer, and assess the company's performance. You must use ratios and the cash flows statement to back up your answer.

1. Write a brief memo to Doug and Debbie Smith explaining the purpose of the statement of cash flows (#1) and also share your analysis of the business (#6). Also, should they continue the jewelry business or go back to their other career jobs?

1. Ethics question-You are part of management of a company that is having a tough year. The company's Board of Directors has decided the company needs a loan. Management knows that the bank will scrutinize the cash flows statement especially the operating activities. Management has suggested moving some outstanding accounts receivables of slow paying clients from current assets to long term assets. This move will increase the net cash provided by operations and possibly help the company get the loan. Are the actions of management ethical or unethical? Again this is not a just a yes or no question. Please back up your response.