Problem:
After you have gained five years of experience with a large CPA firm, one of your clients, Duke Inc., asks you to take over as chief financial officer for the business. Duke advises its client on the purchase of software products and assists them in installing the programs on their computer systems. Because the business is relatively new (it began servicing clients in January 2008), its accounting records are somewhat limited. In fact, the only statement available is the the following income statement for the first year:
Revenue $1,250,000
Expense:
Salaries and wages $ 48,000
Supplies $ 65,000
Utilities $ 30,000
Rent $120,000
Depreciation $345,000
Interest $138,000
Total Expense $1,178,000
Net income $ 72,000
Based on its relatively modest profit margin of 5.76% (net income of $72,000 divided by revenues of $1,250,000 you are concerned about joining the new business. To alleviate your concerns, the president of the company is able to give you the following additional information:
A. Clients are given 90 days to pay their bills for consulting service provided by Duke. On December 31, 2008, $230,000 of the revenues is yet to be collected cash.
B. Employees are paid on a monthly basis. Salaries and wages of $480,000 included the December payroll of $40,000, which will be paid on January 5, 2009.
C. The company purchased $100,000 of operating supplies when it began operations in January. The balance supplies on hand at december3n1amounts to $35,000.
D. Office space is rented in the downtown high-rise building at a monthly cost of $10,000. When the company moved into the office in January, it prepaid it rent for the next 18 months beginning January 1, 2008.
E. On January 1, 2008, Duke purchased a computer system and related accessories at a cost of $1,725,000. The estimated useful life of the system in five years.
F. The computer system was purchased by signing three-year, 8% note for $1,725,000 on the date of purchase. The principle amount of the note and interest for three years are due on January 1, 2011.
Required to do:
1. Based on the income statement given and additional information given, prepare a statement of cash flows for Duke for 2008 (hint: Simply list all cash inflows and outflows that relate to operations.)
2. On the basis of the income statement given and the statement of cash flow prepared in (1), do you think it would be a wise decision to join the company as its chief financial officer? Include your response any additional questions that you believe are appropriate to ask before joining the company.