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Statement of cash flows
Kazaam Company, a merchandiser, recently completed its calendar-year 2005 operations. For the year,
(1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. Kazaam’s balance sheets and income statement follow: KAZAAM COMPANY Comparative Balance Sheets December 31, 2005 2005 2004 Assets Cash.. . $ 53,875 $ 76,625 Accounts receivable.. . 65,000 49,625 Merchandise inventory.. . 273,750 252,500 Prepaid expenses.. . 5,375 6,250 Equipment.. . 159,500 110,000 Accum. Depreciation—Equipment.. . (34,625) (44,000) Total assets.. . $522,875 $451,000 Liabilities and Equity Accounts payable.. . $ 88,125 $116,625 Short-term notes payable.. . 10,000 6,250 Long-term notes payable.. . 93,750 53,750 Common stock, $5 par value.. . 168,750 156,250 Contributed capital in excess of par, common stock.. . 32,500 0 Retained earnings.. . 129,750 118,125 Total liabilities and equity.. . $522,875 $451,000 KAZAAM COMPANY Income Statement For Year Ended December 31, 2005 Sales.. . $496,250 Cost of goods sold.. . 250,000 Gross profit.. . 246,250 Operating expenses Depreciation expense.. . $ 18,750 Other expenses.. . 136,500 155,250 Other gains (losses) Loss on sale of equipment.. . 5,125 Income before taxes.. . $ 85,875 Income taxes expense.. . 12,125 Net income.. . $ 73,750 |
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 Originally Posted by Southernluv
Net income $73,750 Adjustments: Depreciation $18,750 Loss on sale of equipment $5,125 Sub-total $97,625 Increase: A/R ($15,375) Inventories ($21,250) Increase short-term notes payable $3,750 Decrease: Prepayments $875 A/P ($28,500) Net cash from operating activities $37,125 Cash flows from investing activities Proceeds from sale of equipment $13,625 Purchase of equipment ($25,000) Net cash used in investing activities ($11,375) Cash flows from financing activities Proceeds from issue of share capital $45,000 Repayment of long-term notes payable ($31,375) Dividends paid ($62,125) Net cash used in financing activities ($48,500) Net decrease in cash and cash equivalents ($22,750) CCE at beginning of period $76,625 CCE at end of period $53,875 Note: Equipment costing $71,375 were paid for by the signing of a long-term note payable. 2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the Wisdom of the cash dividend payment. The company's AR has increased while its AP has decreased. Effectively this means that it's financing its debtors, which is not very clever. In addition, its COGS for a whole year was only $250,000, but it has $273,750 in ending inventory, i.e. it's holding more than a year's sales in inventory. It has tied up much of its funds in inventory. It already does not have sufficient cash, thereby causing it to borrow via short- and long-term notes payable (and incurring interest expense) and yet it saw fit to pay a dividend. Not very clever is an understatement. |
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Originally Posted by tlee9
Net income $73,750 Adjustments: Depreciation $18,750 Loss on sale of equipment $5,125 Sub-total $97,625 Increase: A/R ($15,375) Inventories ($21,250) Increase short-term notes payable $3,750 Decrease: Prepayments $875 A/P ($28,500) Net cash from operating activities $37,125 Cash flows from investing activities Proceeds from sale of equipment $13,625 Purchase of equipment ($25,000) Net cash used in investing activities ($11,375) Cash flows from financing activities Proceeds from issue of share capital $45,000 Repayment of long-term notes payable ($31,375) Dividends paid ($62,125) Net cash used in financing activities ($48,500) Net decrease in cash and cash equivalents ($22,750) CCE at beginning of period $76,625 CCE at end of period $53,875 Note: Equipment costing $71,375 were paid for by the signing of a long-term note payable. 2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the Wisdom of the cash dividend payment. The company's AR has increased while its AP has decreased. Effectively this means that it's financing its debtors, which is not very clever. In addition, its COGS for a whole year was only $250,000, but it has $273,750 in ending inventory, i.e. it's holding more than a year's sales in inventory. It has tied up much of its funds in inventory. It already does not have sufficient cash, thereby causing it to borrow via short- and long-term notes payable (and incurring interest expense) and yet it saw fit to pay a dividend. Not very clever is an understatement. |
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