Kazaam Company, a merchandiser, recently completed its calendar year 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, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s balance sheets and income statement follow.
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KAZAAM COMPANY Comparative Balance Sheets December 31,2011 and 2010 |
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2011 |
2010 |
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Assets |
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|
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Cash |
$ 53,875 |
$ 76,625 |
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Accounts receivable |
65,000 |
49,625 |
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Merchandise inventory |
273,750 |
252,500 |
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Prepaid expenses |
5,375 |
6,250 |
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Equipment |
159,500 |
110,000 |
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Accum depreciation—Equipment |
(34,625) |
(44,000) |
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Total assets |
$522,875 |
$451,000 |
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Liabilities and Equity |
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|
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Accounts payable |
$ 88,125 |
$116,625 |
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Short term notes payable |
10,000 |
6,250 |
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Long term notes payable |
93,750 |
53,750 |
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Common stock, $5 par value |
168,750 |
156,250 |
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Paid in capital in excess |
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|
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of par, common stock |
32,500 |
0 |
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Retained earnings |
129,750 |
118,125 |
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Total liabilities and equity |
$522,875 |
$451,000 |
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KAZAAM COMPANY Income Statement For Year Ended December 31,2011 |
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Sales |
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$496,250 |
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Cost of goods sold |
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250,000 |
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Gross profit |
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246,250 |
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Operating expenses |
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|
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Depreciation expense |
$ 18,750 |
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Other expenses |
136,500 |
155,250 |
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Other gains (losses) |
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|
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Loss on sale of equipment |
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5,125 |
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Income before taxes |
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85,875 |
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Income taxes expense |
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12,125 |
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Net income |
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$ 73,750 |
Additional Information on Year 2011 Transactions
a. The loss on the cash sale of equipment was $5,125 (details in b).
b. Sold equipment costing $46,875, with accumulated depreciation of $28,125, for $13,625 cash.
c. Purchased equipment costing $96,375 by paying $25,000 cash and signing a long term note payable for the balance.
d. Borrowed $3,750 cash by signing a short term note payable.
e. Paid $31,375 cash to reduce the long term notes payable.
f. Issued 2,500 shares of common stock for $18 cash per share.
g. Declared and paid cash dividends of $62,125.
Required
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.
2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment.