Jazzec Ltd

Statement of Financial position

As at September 30,

	2019	2018
Cash	200,000	50,000
Accounts Receivable (net)	300,000	375,000
Inventory	825,000	800,000
Prepaid Insurance Expenses	20,000	25,000
Equipment	2,500,000	2,000,000
Accumulated Depreciation	(700,000)	(500,000)
	3,145,000	2,750,000

	2019	2018
Accounts payable	500,000	480,000
Salaries & wages payable	300,000	315,000
Income tax payable	120,000	115,000
Accrued Interest payable	17,000	20,000
Bonds payable due July 31, 2022	400,000	450,000
Common shares	1,378,000	1,140,000
Retained earnings	430,000	230,000
Total liabilities and shareholders equity	3,145,000	2,750,000

Jazzec Ltd

Income Statement

For the year ended September 30, 2019

	$	$
Sales		5,000,000
Less: Cost of goods sold		3,500,000
Gross profit		1,500,000
Less Expenses:
Salaries and employee benefits	600,000
Depreciation expense	200,000
Interest expense	150,000
Insurance	100,000
Income tax expense	250,000	1,300,000
Net profit		200,000

Additional information:

• No equipment was sold during the year
• No dividends were declared and paid during the year

Required:

1. Prepare the operating activities section of the statement of cash flows using the direct method
2. Calculate the companys current debt coverage ratio and free cash flow. Comment on the companys cash flow liquidity.