Part D (28 marks) The accounting department of Garret Inc., has prepared an income statement for the current year and also has developed the "Additional Information" listed below by analyzing changes in the company's balance sheet accounts. Garrent Inc. Income Statement For the year ended December 31, 2016 Revenues and gains: Net sales $2,460,000 Interest revenue 120,000 Gain on sale of property and equipment 10.000 Total revenues and gains $2,590,000 Costs, expenses, and losses: Cost of goods sold $1,300,000 Operating expenses (including depreciation of S190,000) 825,000 Interest expense 100,000 Income taxes 95,000 Loss on sale of marketable securities 30,000 Total costs, expenses, and losses 2.350.000 Net income $ 240,000 Additional information: Information about changes in the company's balance sheet accounts over the year is summarized below: 1. Accounts receivable decreased by S40,000. 2. Interest receivable increased by $5,000. 3. Inventory increased by $100,000, and accounts payable to suppliers of merchandise increased by $80,000. 4. Short-term prepayments of operating expenses decreased by $8,000, and accrued liabilities for operating expenses increased by $50,000. 5. The liability for interest payable decreased by $4,000 during the year. 6. The liability for income taxes payable increased by $9,000 during the year. 7. The following schedule summarizes the total debit and credit entries during the year in other balance sheet accounts: 9 Marketable securities Notes receivable (cash loans made to borrowers) Property and equipment (see paragraph 8) Notes payable (short-term borrowing) Common stock Retained earnings (see paragraph 9 below) Debit Entries $185,000 210,000 625,000 340,000 Credit Entries $170,000 250,000 50,000 225,000 400,000 240,000 150,000 8. The $50,000 in credit entries to the property and equipment account is net of any debits to accumulated depreciation when property and equipment were retired. 9. The $150,000 debit to retained earnings represents dividends declared and paid during the year. The $240,000 credit entry represents the net income shown in the income statement 10. All investing and financing activities were cash transactions. 11. Cash and cash equivalents amounted to $190,000 at the beginning of the year, and to $283,000 at year-end. Required: 1. Prepare a cash flow statement using the indirect method for the current year. (26 marks) 2. Garret's management has argued that issuance of a cash flow statement to creditors and investors is not necessary because the company clearly maintains an adequate cash balance. Give two reasons why a cash flow statement is useful to creditors and investors even when the amount of cash on hand appears quite adequate. (2 marks)
