(Observing the effects of accounting choices on the cash flow statement, LO 4, 8) Barkway Inc. (Barkway)...
Question:
(Observing the effects of accounting choices on the cash flow statement, LO 4, 8)
Barkway Inc. (Barkway) is in the process of finalizing its cash flow statement for 2006.
The statement has been completely prepared except for the new product development costs that the controller has not decided how to account for. Preliminary net income, before accounting for the development costs, is $97,000. The product development costs for the year are $82,000. Based on the controller’s interpretation of the CICA Handbook, an argument could be made for either capitalizing the costs or expensing them. Barkway’s preliminary cash flow statement is shown below:
Required:
a. Complete the cash flow statement (shaded boxes) assuming that: i. the new product development costs are capitalized and amortized, and ii, the new product development costs are expensed when incutred. Assume that if the product development costs are capitalized, it is not necessary to amortize any of the costs in 2006.
b. Compare the two cash flow statements. How is your evaluation of Barkway influenced by the two statements?
c. How are the balance sheet and the income statement affected by the accounting treatment for the new product development costs?
d. If Barkway’s management received their bonuses based on net income, which treatment for the product development costs do you think they would prefer? Explain.
Transcribed Image Text:
Barkway Inc. Cash Flow Statement For the Year Ended August 31, 2006 Cash from operations Net income Add: Amortization 37,000 Less: Gain on sale of capital assets 21,000 Less: Net increase in non-cash working capital 35,000 Cash from operations Investing activities Proceeds from the sale of capital assets 49,000 Purchase of capital assets (98,000) Cash from (used for) investing activities Financing activities Increase in long-term debt 75,000 Repayment of mortgage loan (25,000) (10,000) Dividends Cash from (used for) financing activities Change in cash during 2006 Cash and equivalents, beginning of the year Cash and equivalents, end of the year 22,000
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