(Preparing a cash flow statement using the direct method to determine cash from operations, LO 4) Examine Agu Inc.’s (Agu) balance sheets and income statement below.

Additional information:
i. During 2005, dividends of $91,000 were paid to the shareholders of Agu Inc.
ii. $750,000 of Agu’s sales were for cash. The remaining sales were made on credit.
iii. All of Agu’s purchases of supplies were made on credit. Purchases of supplies on credit are reflected in the Accounts Payable account.
iv. During 2005 Agu sold for $97,000 capital assets that cost $100,000 and had a net book value of $72,000. (Remember that when amortizable capital assets are sold, the cost of the asset and the accumulated amortization associated with the asset must be removed from the books. In this situation, the Capital Assets account would be reduced by $100,000 and the Accumulated Amortization account would be reduced by $28,000.)
v. Advertising and Marketing and Other Expenses were fully paid in cash during 2005. General and Administrative Expenses are expensed and paid in cash when incurred, except for Prepaid Rent and Prepaid Insurance.
During 2005 Agu expensed $35,000 of prepaid items.
vi. Accrued Liabilities pertain to salaries and wages.
Required:

a. Use the information provided to prepare a cash flow statement for Agu for the year ended March 31, 2005. Use the direct method for calculating cash from operations.

b. Assume the role of a lender who is evaluating Agu’s situation. Analyze and interpret the cash flow statement you prepared and prepare a report to your manager describing what you learned about Agu from the statement.

Transcribed Image Text:

Agu Inc. Balance Sheets As of March 31, 2004 and 2005 2005 2004 2005 2004 Assets Liabilities and shareholders' equity Current assets Cash Current liabilities $ 125,000 $ 62,000 Accounts payable $ 27,000 $20,000 Accounts receivable 271,000 197,000 Accrued liabilities 125,000 140,000 Supplies inventory Prepaids 45,000 53,000 Interest payable 42,000 37,000 13,000 22,000 Taxes payable 92,000 59,000 Total current assets Capital assets 454,000 334,000 Total current liabilities 286,000 256,000 2,250,000 1,346,000 Note payable 951,000 659,000 Accumulated amortization (610,000) (443,000) Capital stock 400,000 200,000 Retained earnings 457,000 122,000 Total liabilities and Total assets $2,094,000 $1,237,000 shareholders' equity $2,094,000 $1,237,000