ACC1002

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QUESTION 3

The following shows the comparative balance sheets and income statement of Wescott

Company.

Wescott Company

Balance Sheets

At December 31

2011 2010

Assets:

Cash $ 85,600 $ 65,200

Accounts receivable, net. 72,850 56,750

Merchandise inventory 157,750 144,850

Prepaid expenses. 6,080 12,680

Equipment 280,600 245,600

Accumulated depreciation-Equipment (80,600) (97,600)

Total assets. $522,280 $427,480

Liabilities:

Accounts payable $ 52,850 $ 45,450

Income taxes payable. 15,240 12,240

Notes payable (long term).. 59,200 79,200

Total liabilities $127,290 $136,890

Equity:

Share Capital. 200,000 150,000

Share Premium.. 53,000 40,000

Retained earnings.. 141,990 100,590

Total equity $394,990 $290,590

Total liabilities and equity $522,280 $427,480

Wescott Company

Income Statement

For Year Ended December 31, 2011

Sales $ 488,000

Cost of goods sold. $212,540

Depreciation expense 43,000

Other operating expenses 106,260

Interest expense.. 6,400 (368,200)

Gain on sale of equipment. 4,700

Income before taxes 124,500

Income taxes expense. (41,100)

Net income.. $ 83,400

Additional information

1. A $20,000 note payable is retired at its carrying amount in exchange for cash.

2. The only changes affecting retained earnings are net income and cash dividends paid.

Cash dividends paid is to be classified under financing activities.

3. New equipment is acquired for $120,000 cash.

4. Received cash for the sale of equipment that had cost $85,000, yielding a gain of $4,700.

5. Prepaid expenses relate to Other operating expenses on the income statement.

6. Interest paid is to be classified under operating activities.

Required:

a) Prepare a statement of cash flows for the year ended December 31, 2011 using the indirect method based on IFRS.

b) Explain the effect, if any, of each of the following transactions and events on Wescott

Company’s profit and on its cash flows:

i. Payment of a supplier’s invoice.

ii. An accrued expense at the end of an accounting period.

iii. Payment of a dividend.

iv. Purchase of inventory for cash.

v. Investing spare or unused cash in a high-interest bank account, repayable at 7 days’ notice.