National Sports, Inc., is a sports equipment sales company. During 2011, the company replaced USD 18,000 of its fully depreciated equipment with new equipment costing USD 23,000. Although a midyear dividend of USD 5,000 was paid, the company found it necessary to borrow USD 5,000 from its bank on a two-year note. Further borrowing may be needed since the Cash account is dangerously low at year-end.
Following are the income statement and “cash flow statement”, as the company”s accountant calls it, for 2011.
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National Sports, Inc. |
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Income Statements For the year ended 2011 December 31 |
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Sales |
$195,000 |
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Cost of goods sold |
$140,000 |
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Operating expense and taxes |
49,700 |
1,89,700 |
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Net income |
$5,300 |
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National Sports, Inc. |
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Cash flow Statement For the Year ended 2011 December 31 |
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Cash received: |
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From operations: |
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Net income |
$5,300 |
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Depreciation |
5,000 |
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Total cash from operations |
$10,300 |
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Note issued to back |
5,000 |
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Mortgage note issued |
16,000 |
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Total funds provided |
$31,300 |
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Cash paid: |
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New equipment |
$23,000 |
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Dividends |
5,000 |
28,000 |
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Increase in cash |
$ 3,300 |
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The company”s president is very concerned about what he sees in these statements and how it relates to what he knows has actually happened. He turns to you for help. Specifically, he wants to know why the cash flow statement shows an increase in cash of USD 3,300 when he knows the cash balance decreased from USD 15,000 to USD 500 during the year. Also, why is depreciation shown as providing cash?
You believe you can answer the president”s questions after receiving the following condensed balance sheet data:
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National Sports, Inc. |
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Comparative Balance Sheets 2011 December 31, and 2010 December 31 |
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Assets |
2011 |
2010 |
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Current assets: |
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Cash |
$ 500 |
$ 15,000 |
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Accounts receivable, net |
17,800 |
13,200 |
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Merchandise inventory |
28,500 |
17,500 |
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Prepaid expenses |
700 |
300 |
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Total current assets |
$ 47,500 |
$ 46,000 |
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Property, plant, and equipment: |
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Equipment |
$40,000 |
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Accumulated depreciation – equipment |
-11,000 |
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Total property, plant, and equipment |
$ 29,000 |
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Liabilities and stockholders” equity |
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Current liabilities: |
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Accounts payable |
$ 8,700 |
$ 10,000 |
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Accrued liabilities payable |
600 |
1,100 |
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Total current liabilities |
$ 9,300 |
$ 11,100 |
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Long-term liabilities: |
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Notes payable |
5,000 |
-0- |
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Mortgage note payable |
16,000 |
-0- |
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Total liabilities |
$ 30,300 |
$ 11,100 |
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Stockholders” equity: |
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Common stock |
$ 40,000 |
$ 40,000 |
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Retained earnings |
6,200 |
5,900 |
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Total stockholders” equity |
$ 46,200 |
$ 45,900 |
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Total liabilities and stockholders” equity |
$ 76,500 |
$ 57,000 |
Prepare a correct statement of cash flows using the indirect method that shows why National Sports, Inc., is having such a difficult time keeping sufficient cash on hand. Also, answer the president”s questions. The company paid interest of USD 400 and income taxes of USD 3,000.