Kazaam Company, a merchandiser, recently completed its calendar-year 2011 operations. For the year, (1) all sales credit sales, (2) all credits to Account 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 Expense. The company’s balance sheets and income statement follow.


Income Statement

For Year Ended December 31, 2011

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 tax expense 12,125

Net Income $73,750


Comparative Balance Sheets

December 31,2011 and 2010

2011 2012


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 – equip (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

Paid in Capital in excess of par, common stock 32,500 0

Retained earnings 129,750 118,125

Total Liabilities and equity $522,875 $451,000

Additional Information on Year 2011

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 $13,624 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.


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.

Analysis component

2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment.