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.
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