Question

Ashley Limited, which follows IFRS, chooses to classify interest and dividends received as well as interest paid as operating activities and dividends paid as financing activities. Ashley had the following information available at the end of 2017:

ASHLEY LIMITED Comparative Statement of Financial Position December 31, 2017 and 2016 2017 Cash $ 25,400 Accounts receivable 13,500 FV-NI investments 20,000 Inventory 42,000 Prepaid rent 7,000 Prepaid insurance 2,100 Office supplies 1,000 Land 125,000 Buildings 350,000 Accumulated depreciation buildings (105,000) Equipment 525,000 Accumulated depreciation equipment (130,000) Patents 90,000 Accumulated amortization-patents (45,000) Total assets $921,000 Temporary bank overdraft Accounts payable 22,000 Income tax payable 5,000 Salaries and wages payable 5,000 Short-term notes payable (trade) 10,000 Long-term notes payable (non-trade) 60,000 Deferred tax liability 30,000 Bonds payable 375,000 Common shares 260,000 Retained earnings 154,000 Total liabilities and shareholders' equity $921,000 2016 -0- 16,950 30,000 35,000 12,000 900 750 175,000 350,000 (87,500) 400,000 (112,000) 90,000 (40,000) $ 871,100 12,000 20,000 6,000 1,000 10,000 70,000 25,000 375,000 237,500 114,600 $ 871,100 ASHLEY LIMITED Income Statement Year Ended December 31, 2017 Sales revenue $1,160,000 Cost of goods sold (748,000) Gross margin 412,000 Operating expenses Selling expenses $ 39,200 Administrative expenses 124,700 Salaries and wages expense 92,000 Depreciation and amortization expense 40,500 Total operating expenses (296,400) Income from operations 115,600 Other revenues/expenses Gain on sale of land 8,000 Investment income (Note 1) 6,400 Interest expense (41,750) (27,350) Income before taxes 88,250 Income tax expense (29,400) Net income $ 58,850 Note 1: Investment income generated by (FV-NI) investments includes dividend income of $2,400 and a gain on sale of investments of $4,000.

Instructions

(a) Prepare a statement of cash flows for Ashley Limited using the direct method, accompanied by a schedule that provides cash flow from operations using the indirect approach.

(b) Does Ashley Limited have any options available for the classification of interest and dividends paid or received?

(c) Prepare a memo for top management that summarizes and comments on Ashley’s cash activities in 2017.

Answer 1

Answer with working notes is given below

ASHLEY LIMITED Statement of Cash flows (Direct method) For the year ended December 31,2017 Cash flows from Operating Activities Cash received from customers $1,163,450 Cash received as dividend $2,400 Amount $1,165,850 -$753,000 -$248,350 -$41,750 -$25,400 $1,068,500 $97,350 Less: Cash payments for Cash paid for Suppliers Cash paid for operating expense Cash paid for Interest Cash paid for Income taxes Net Cash provided by Operating Activities Cash flows from Investing Activities Sale of Land Sale of investments Purchase of Equipment Net Cash used in Investing Activities Cash flows from Financing Activities Issuance of common stock Repayment of long term notes Payment of dividend Net Cash from Financing Activities Net change in cash Cash and Cash equivalents at beginning of year Cash and Cash equivalents at end of year $58,000 $14,000 -$125,000 -$53,000 $22,500 -$10,000 -$19,450 ($114,600+$58,850 - $154,000) $6,950 $37,400 -$12,000 $25,400 Working notes: Amount of cash received from Customers Sales Add: Decrease in Accounts receivable Net cash received from customers $1,160,000 $3,450 $1,163,450 Cost of inventory purchased Cost of Goods sold Add : Increase in inventory Merchandise purchase $748,000 $7,000 $755,000 Amount of cash paid to suppliers of merchandise cost of purchase Less: Increase in Accounts payable Cash paid for Suppliers $755,000 -$2,000 $753,000 Amount of cash paid for Operating expense Salaries, Administrative and salaries/wages Less: Decrease in prepaid rent Add: Increase in prepaid insurance Add: Increase in salaries and wages payable Increase in office supplies Net cash paid for operating expense $255,900 $5,000 $1,200 -$4,000 $250 $248,350 Cash paid for income tax Income tax expense Less: Increase in Deferred tax liability Add: Decrease in income tax payable Net cash paid for Income tax $29,400 -$5,000 $1,000 $25,400 Cash flow from Operations using indirect approach Cash flows from Operating Activities Amount Net Income $58,850 Add (deduct) items to convert net income to cash basis Depreciation and amortization expenses $40,500 Gain on sale of land ($8,000) Gain on sale of investment ($4,000) Decrease in Accounts receivable $3,450 Increase in inventory ($7,000) Decrease in prepaid rent $5,000 Increase in prepaid insurance ($1,200) Increase in office supplies ($250) Increase in Accounts payable $2,000 Increase in salaries and wages payable $4,000 Decrease in income tax payable ($1,000) Increase in Deferred tax liability $5,000 Net Cash provided by Operating Activities $97,350 b) Interest paid can be shown as financing activity Interest and dividend received can be shown as investing activity Whatever choice is made by the reporting entity the reporting should be an accounting policy and consistently followed Memo to Top management: Summary of performance: The cash follow on account of operating activities has been positive during the year The operating cash flow is mainly driven by collection from customers Fixed Assets(Equipments) of $125,000 has been purchased during the year. The free cash flow(Cash flow from operations - fixed assets purchase) is positive during the year Land and long term investments have been sold during the year at profit In terms of financing activities common shares have been issued during the year Long term notes payable has been repaid during the year Dividend has also been paid to common shareholders out of net profit The year started with bank overdraft( cash equivalent) and ended with positive cash balance