QUESTION 1

Below are the financial statements of Purple Panther Ltd.

PURPLE PANTHER LTD
Statement of Financial Position
as at 31 December 2007
	2007		2006
Assets
Cash		72,000		31,200
Accounts receivable		43,200		33,600
Inventory		81,600		84,000
Plant	168,000		187,200
Less: Accumulated depreciation	(72,000)	96,000	(57,600)	129,600
Total Assets		292,800		278,400
Liabilities and Equity
Accounts payable		69,600		79,200
Income tax payable		36,000		48,000
Debentures payable		36,000		24,000
Share capital		72,000		60,000
Retained earnings		79,200		67,200
Total Liabilities and Equity		292,800		278,400

PURPLE PANTHER LTD
Statement of Profit or Loss
for the year ended 31 December 2007
Sales		600,000
Cost of sales		432,000
Gross profit		168,000
Selling expenses	60,000
Administrative expenses	45,600
Interest expense	4,800	110,400
Profit before income tax		57,600
Income tax expense		16,800
Profit		40,800

The following additional data was provided:

1. All operating expenses except depreciation are paid in cash.
2. Additional equipment was purchased for $16,800 cash.
3. Accounts payable pertains to inventory creditors.
4. Dividends of $28,800 were declared and paid.
5. All sales and purchases are on account.
6. During the year furniture was sold for $24,000 cash. This furniture originally cost $36,000 and had an accumulated depreciation of $12,000 at the time of sale.
7. All the depreciation expense, $26,400, is in the selling expense category.

Required:

1. Prepare a statement of cash flows for the year ended 31 December 2007 for Purple Panther Ltd, use the direct method for operating cash flows.

2. Peter Purple, the owner of the business, has come to you because he is confused about his current business situation. He asks you to explain to him how his cash from operations could be less than his profit for the year. Explain to Peter how this can be.