(Observing the effects of accounting choices on the cash flow statement, LO 4, 8) Juskatla Ltd. (Juskatla)...
Question:
(Observing the effects of accounting choices on the cash flow statement, LO 4, 8)
Juskatla Ltd. (Juskatla) is in the process of finalizing its cash flow statement for 2004.
The statement has been completely prepared except for some costs that the controller is not sure whether to classify as repairs or betterments. Normally these types of costs are relatively minor, but this year they were significant and so the classification will have an impact on the financial statements. The preliminary net loss, before accounting for the repairs/betterments, is $425,000. The repair/betterment costs for the year are $210,000. The nature of the costs is ambiguous so the controller will likely be able to classify them as either repairs or betterments.
Required:
a. Complete the cash flow statement (shaded boxes) assuming that:
i. the costs are treated as betterments, and ii. the costs are treated as repairs.
Assume that if the costs are treated as betterments, it will be necessary to amortize $40,000 in 2004.
b. Compare the two cash flow statements. How is your evaluation of Juskatla influenced by the two statements?
c. How are the balance sheet and the income statement affected by the accounting treatment for the repairs/betterments?
d. Assuming that the controller is correct in her belief that the costs can be reasonably classified as either repairs or betterments, what factors would you advise the controller to consider in making her decision? Explain.
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