Required: Prepare the Direct Method of Cash Flows; Prepare a complete statement

Question

Required: Prepare the Direct Method of Cash Flows; Prepare a complete statement of cash flows;

Kazaam Comp., a merchandiser, recently completed its 2011 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, (5) Other Expenses are all cash expenses, and (6) any change in Income Taxes Payable reflects the accrual and cash payment of taxes. The company

Explanation / Answer

1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. Disclose any noncash investing and financing activities in a note. Cash flows from operating activities Net income $73,750 Adjustments for: Depreciation $18,750 Loss on sale of equipment $5,125 Sub-total $97,625 Increase in accounts receivable ($15,375) Increase in inventories ($21,250) Decrease in prepayments $875 Decrease in accounts payable ($28,500) Increase in short-term notes payable $3,750 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.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.