Question 2 (10 Marks) The Statement of Cash Flows of Gourmet Corporation for Year Ended December 31, Year 2019 (refer Exhibit 2.1) was prepared based on the following information on Gourmet Corporation's Balance Sheet and Income Statement. Exhibit 2.4 is a conversion adjustment made on the Cash Flows from Operations. Some additional information also included. Exhibit 2.1: The Statement of Cash Flows of Gourmet Corporation for Year Ended December 31, Year 2019 Gourmet Corporation Statement of Cash Flows For Year Ended December 31, Year 2019 $ 127,000 42,000 -5,000 -15,300 7,200 2,600 - 12,580 5,000 150,920 Net income Add (deduct) Depreciation & amortization expense Gain on sale of assets Accounts receivable Inventories Prepaid expenses Accounts payable Accrued expenses Net cash flows from operating Purchase of equipment Sale of equipment Net cash flows from investing activities Mortgage payable Preferred stock Dividends Net cash flows from financing activities Net increase in cash Beginning cash Ending cash -60,000 8,000 -52,000 -150,000 175,000 -49,000 -24,000 74,920 48,000 122,920 Exhibit 2.2: The Comparative Balance of Gourmet Corporation for Year Ended December 31, Year 2019 and Year 2018 Gourmet Corporation Comparative Balance Sheet December 31, Year 2019 and Year 2018 ($) Cash Receivables Inventory Prepaid expenses Plant assets Accumulated depreciation Intangible assets Total assets 2019 2018 81,500 52,800 51,000 35,700 54,000 61,200 5,700 8,300 440,000 350,000 -145,000 -125,000 51,000 58,000 538,200' 441,000 Account payable Accrued expenses Long-term note payable Mortgage payable Preferred stock Common stock Retained earnings Total liabilities and equity 43,420 56,000 18,000 13,000 30,780 0 0 150,000 175,000 223,000 200,000 48,000 22,000 538,200 441,000 Exhibit 2.3: The Income Statement of Gourmet Corporation for Year Ended December 31, Year 2019 Gourmet Corporation Income Statement For Year Ended December 31, Year 2019 Sales Cost of sales Gross profit Operating expenses Depreciation & amortization Gain on sale of asset Net Income $ $760,000 -413,000 347,000 -183,000 -42,000 5,000 $127,000 Exhibit 2.4: The Conversion Adjustment of Cash Flows from Operation of Gourmet Corporation for Year Ended December 31, Year 2019 Gourmet Corporation Cash Flows from Operations For Year Ended December 31, Year 2019 1. Cash flows from operating activities Cash receipts from customer 744,700 Cash paid for inventories -418,380 Cash paid from operating expenses 175,400 Net cash flows from operations 501,720 Additional information: The company purchase a machinery during the year at cost $40,000 that was fully financed in full by manufacturer. 2. A machine with a cost of $10,000 and a net book value of $ 3,500 was sold during the year for $8,000. There were no other sales of depreciable assets. 3. Dividend paid during 2019 are $49,000. Required: Discuss how the machinery purchase of $40,000 that was fully financed in full by manufacturer should be recorded on Statement of Cash flows. (2 marks) (b) Describe how items on Net Cash Flows from Investing Activities are recorded on the Statement of Cash flows? (4 marks) Describe method used to adjust the Cash Flows from Operation (refer Exhibit 2.4) in details. In your discussion, provide computations on all items from Exhibit 2.4 (4 marks)
