Question 2

The following is a summary of the annual financial statements of Texton Ltd.

Texton Ltd. Income Statement For the Year Ending September 30, 2021
	$
Revenue	850,000
Cost of sales	(637,500)
Cross profit	212,500
Administrative expenses	(28,100)
Operating expenses	(73,600)
Profit from operations	110,800
Finance cost	(15,800)
Profit before tax	95,000
Income tax expense	(44,000)
Profit for the period	51,000

Texton Ltd. Statement of Changes in Equity For the Year Ending September 30, 2021
	Share capital ($)	Revaluation reserve ($)	Accumulated profit ($)	Total ($)
Balancebeginning of the year	120,000		121,000	241,000
Revaluation of buildings		20,000		20,000
Profit for the period			51,000	51,000
Dividends paid			(25,000)	(25,000)
Repayment of share capital	(20,000)			(20,000)
Balanceend of the year	100,000	20,000	147,000	267,000

Texton Ltd. Balance Sheet On September 30, 2021
	2021 ($)	2020 ($)
Noncurrent Assets Property, plant, and equipment
Office buildings	250,000	220,000
Motor vehicles	35,000	20,000
Machinery	6,000	4,000
Long-term loans to directors	64,000	60,000
	355,000	304,000
Current Assets
Inventories	82,000	42,000
Debtors	63,000	43,000
Prepaid Expenses	21,000	16,000
Bank	-	6,000
	166,000	107,000
Total Assets	521,000	411,000
Equity and Liabilities Capital and Reserves
Share Capital	100,000	120,000
Revaluation Reserve	20,000	-
Accumulated Profits	147,000	121,000
	267,000	241,000
Noncurrent Liabilities
Long-Term Borrowings	99,000	125,000
Current Liabilities
Creditors	72,000	35,000
Bank	43,000	-
Taxation Due	40,000	10,000
	155,000	45,000
Total Equity and Liabilities	521,000	411,000

Additional information

1. The depreciation charges included in operating expenses are as follows:

Motor vehicles $25,000

Machinery $ 2,000

2. Fully depreciated Motor vehicles with an original cost price of $15,000 was sold for $5,000 during the year. The profit is included in operating expenses.

3. The chief accountant claims that the company is heading for a potential liquidity crisis. According to him, the company struggled to meet its short-term obligations during the current year.

Required:

1. Prepare the cash flow statement using the direct method. (4 marks)
2. Comment on the Chief accountants claim. (1 marks)