1) What is the effect of each transaction of OxygenFilter on the 2011 Financial statements (using the same schedule as the one appearing in the attached file (sample for an expanded accounting equation), andadding to it the necessary columns for the income statementelements)?
2) Using both the direct method and the indirect method regarding operating activities, what are OxygenFilter’s financial statements as of 31 December 2011 : income statement, balance sheet, and statement of cash flows ?
3) What do these three financial statements show, including liquidity measurements and profitability measurements ?
Are all these statements necessary for recording ?
OxygenFilter Inc.
Dr. Andrew Mayer was previously employed as a research scientist for AGR Inc., a company that develops tiny sensors that
detect and identify trace amounts of chemicals in the air. AGR Inc. markets and sells the sensors to industrial companies to assist with leak and hazardous agent detection. Davidson plans to license the technology and develop the sensor for a device that would help physicians detect early-stage cancers.
Patients would breathe directly into the device, which would analyze a user’s breath for traces of key compounds associated with the most common cancers. In addition to eliminating the need for invasive biopsy procedures, the screening tool would also be inexpensive, easy to use and provide immediate results.
In 2010, Davidson applied for the trademark “OxygenFilter” with the United States Patent and Trademark Office and was granted the trademark in September 2010. In addition to the small entity electronic filing fee of 375$ for the trademark, Mayer paid 2’500$ to a lawyer who assisted him with the filing process.
The following provides a summary of events for 2011:
1. On January 2, Mayer, together with three investors, established OxygenFilter Inc. OxygenFilter issued 17’000’000 common shares to investors for 2$ per share.
2. Also on January 2, OxygenFilter issued an additional 3’000’000 shares, which were given to Mayer in exchange for the trademark “OxygenFilter”. The trademark is viewed as a key success factor to the business.
3. On January 5, OxygenFilter signed a one-year licensing agreement with AGR Inc. The licensing period began on February 1, 2011, and the annual fee of 3’000’000$ was paid in full.
4. On January 10, OxygenFilter purchased new machinery that will be used in the production of the OxygenFilter for 13’500’000 in cash. An additional 1’500’000$ was paid for installation.
5. OxygenFilter contracted with a small health technology company to modify the original sensing chip to detect certain volatile organic compounds (VOCs) associated with cancer. Toward the end of February 2011, the health technology company delivered the required specifications and a pre-production model and was paid a total of 2’000’000$.
6. On February 23, OxygenFilter paid 6’000’000$ upon receiving a delivery of materials for use in the production of OxygenFilter.
7. OxygenFilter paid 400’000$ for salaries to corporate officers and employees (for the January to June period).
8. On July 1, OxygenFilter borrowed 6’000’000$ from a bank. The annual interest is 10 percent and is paid semi-annually.
9. Additional materials (electrical components, packaging, labels, etc.) to be used in OxygenFilter production were purchased for a total of 3’000’000$. Under the favorable terms obtained from its suppliers, OxygenFilter will make no payments until February 2012.
10. During the nine months ended December 31, 2011, the company paid 2’000’000$ for fire insurance for the production facility and other production-related expenses (e.g., utilities and labor).
11. An additional 3’300’000$ in cash was paid for corporate salaries and other corporate expenses (for the July to December period).
12. OxygenFilter spent 2’000’000$ in cash on advertising to help introduce the product. They initially started with print advertising in journals and magazines targeted to health care professionals but quickly realized the need for a social media presence. They hired an unpaid intern to help build online awareness.
13. Toward the end of 2011, sales started to accelerate. OxygenFilter sold and shipped a total of 23’000’000 of its products. At the end of the year, a total of 9’600’000$ of these sales had yet to be collected. The largest single receivable was due from a reputable pharmaceutical company, which purchased a substantial number of devices as part of a promotional campaign. Most of the other receivables were on transactions that had been made close to year-end, and were expected to be collected in January 2012.
14. On December 12, OxygenFilter signed a contract with the organizer of the “Transnational Event for Medical Equipment 2012” (TEME) for 1’000 units of OxygenFilter, with the intention of giving them away to health care professionals visiting the trade show. The selling price specified in the contract is 500$ per unit.
OxygenFilter promised to deliver the units on March 10, 2012. TEME had up to 30 days after delivery to pay for the devices.
15. At the end of the year, OxygenFilter paid 300’000$ in interest on their bank loan.
16. OxygenFilter received 200’000$ in interest on its cash account. The following additional information was gathered in the process of preparing OxygenFilter’s financial reports for 2011:
17. The 12-month licensing agreement with Reactor Inc. was due to expire on January 31, 2012. As of December 31, 2011, the company was still negotiating the terms of an extension of the licensing agreement.
18. The machinery used in the production of OxygenFilter was expected to last for approximately 5 years (one year of which had already passed). OxygenFilter did not expect the machinery to have any remaining value after 5 years.
19. As of December 31, 2013, there was still 900’000$ worth of materials in the warehouse. There were no finished or partially finished OxygenFilter devices.
20. The trademark for OxygenFilter is initially valid for 10 years and may be renewed indefinitely for 10-year periods. The filing fee for a trademark renewal was 400$. A valuation analysis conducted at the end of the year suggested that the value of the trademark had increased to approximately 10’000’000$.