Question One

If the management of Twenty-four-seven wants accurate financial reports, they should employ

straight-line depreciation. Using this method helps ensure a consistent annualized depreciation

expense by distributing the cost of the equipment throughout its estimated service life. However,

the double declining balance method accelerates the depreciation expense in the early years of

the equipment's life, leading to higher depreciation expense in the earlier years and lower

depreciation expense in the later years. By selecting straight-line depreciation, annual profit can

be maximized. This is due to the fact that, unlike the double declining balance approach, the

straight-line method results in lower depreciation expense in the early years. Therefore, the

straight-line method would show a higher net income in the first few years, which could pique

the interest of investors.

Question Two

Under FIFO method, first inventory purchased is sold first.

Therefore, COGS = (1500*120+3000*142+1500*160) = $846,000

Income Statement

($)

Revenue 1,800,000

COGS 846,000

Gross Profit 954,000

Operating Expenses 425,000

Net Profit Before Tax 529,000

Income Taxes 132,250

Net Income after Tax 396,750

Using the weighted-average cost method, the cost of goods sold can be calculated as follows:

Weighted-average cost = (120+142+160)/3= 140.67

COGS= 6000 Units * 140.67= $844,020

Income Statement

($)

Revenue 1,800,000

Cost of Goods Sold 844,020

Gross Profit 955,980

Operating Expenses 425,000

Net Profit before Tax 530,980

Income Taxes 132,745

Net Profit after Tax 398,235

When comparing the two approaches to calculating net income, the weighted-average cost

approach yields a greater net income by $1,485 ($398,235 - $396,750) than the FIFO approach.

Consequently, the weighted-average cost method would be selected if management wanted to

report a greater net income for the year.

Question Three

Plan A: Borrowing $77,000 @ 6% interest

Dividends =$98,000

Interest Expense: 6%*77,000= $4,620

Income before Interest and Taxes= 530,980

Add the Additional income 30,000

EBIT 560,980

Deduct Interest expense 4,260

EBT 556,720

Less tax (25%) 139,180

Net Income 417,540

EPS= (417,540-98,000)/100,000

= $3.2

Plan B: 5000 shares @ 15.4

Income before interest and tax 530,980

Additional income 30,000

EBIT 560,980

Less Tax 140,245

Net Income 420,735

EPS= (420,735-98,000)/105,000

= $3.07

Plan A results in a higher EPS of $3.2 compared to Plan B's EPS of $3.07. Therefore, the

management may choose Plan A to maximize the earnings per common share.

Question Four
Statement of Cash Flows for Twenty-Four Seven for the Current Year using the Indirect

Method

Operating Activities:

Net income $398,235

Adjustments to reconcile net income to

net cash provided by operating activities:

Depreciation expense $17,500

Increase in accounts receivable ($11,000)

Increase in inventory ($33,000)

Decrease in prepaid expenses $22,000

Increase in accounts payable $99,000

Decrease in accrued liabilities ($22,000)

Net cash provided by operating activities $470,735

Investing Activities:

Purchase of equipment ($175,000)

Net cash used in investing activities ($175,000)

Financing Activities:

Issuance of common shares $77,000

Dividends paid ($98,000)

Net cash provided by financing activities ($56,000)

Net increase in cash $239,735

Cash at the beginning of the year $0

Cash at the end of the year $239,735

The company's cash flow statement shows that it is generating cash from operations, which is a

positive sign. The company's investment activities demonstrate that it is making long-term

investments in its growth. The issuance of shares and debt to fund operations is evidenced by the

company's financing activities.