SelfGlow, Inc.
Nicholas Cage, a scientist in chemistry, received a patent for one of his inventions—a chemicals based
self-glow instrument. The instrument gives a bright yellow-green glow that does not require any form of
ignition. Cage anticipated a substantial market for the product. It had the appeal of being readily available
in case of emergencies. He anticipated a considerable demand from the safety equipment providers and
adventure camping companies.
On January 2, 2020, Cage, established Self Glow Inc.; 500,000 shares were issued, of which Cage received
125,000 in exchange for his patent, and the remainder were sold to the other investors at $1 per share.
During the period January 2, 2020, through June 30, 2020, the company made the following expenditures:
• January 15—Paid $7,500 in legal fees, charter costs, and printing expenses associated with the
incorporation of the company.
• June 15—Spent $62,500 building the machinery that would be used to produce the first
commercial models of the product.
• June 24—Purchased $75,000 worth of plastics and chemicals for use in the production.
During a meeting with the investors at the end of June 2020 it was reported that the company’s cash
balance has decreased by $145,000 from the beginning cash balance. After considerable discussion
by all the stockholders, it was agreed that they would meet again in early January 2021 to study the
state of the corporation.
During the last half of 2020, the firm experienced full-scale operations. To prepare for the shareholders’
meeting in early January 2021, the firm’s auditors produced the following data:
1. In early July 2020, a consulting engineer delivered the prototypes of the new product, and he
was paid a total of $23,750.
2. During the six months from July to December 2020, $754,500 were generated from the sale of
SelfGlow. A distributor still owed $69,500. All other customers’ accounts were paid in full by
year end.
3. Additional material of Plastics and Chemicals was purchased for a total of $175,000. All
purchases were paid for in cash.
4. $22,500 were spent on television and trade journal advertising to introduce the product.
5. During the six months ended December 31, 2020, the company expended $350,000 on direct
manufacturing labor and on manufacturing-related overhead. An additional $80,000 was
spent on corporate salaries and other corporate expenses.
6. In late June, a further $150,000 was spent on machinery to be used in the production of
SelfGlow
7. During the period, the company had borrowed $50,000 for a short time and repaid the loan
by year-end. The interest paid on the loan amounted to $750.
8. The machinery used in the production is expected to last for 10 years with no salvage value.
Depreciation is to be charged for 6-month period.
9. On December 31, $55,000 worth of production materials of SelfGlow were available with the
stores.
10. It is decided to consider Material consumed, Direct Manufacturing Labor and manufacturing
overheads under Cost of Goods Sold.
10. The patent is expected to have a useful life of 5 years. Prototype and Legal fee are to be
expensed in the FY2020.
11. An adventure camping company signed a MoU to purchase 40,000 units of Self Glow at a
price of $2.50 each in 2021.
12. Tax rate applicable for Innovative Startups is 15%.
Required: Prepare the Cash Flow Statement using Direct and Indirect Methods.
