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. KazaamÂ’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
Additional Information on Year 2005 Transactions
a. The loss on the cash sale of equipment is $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.
Refer to the information reported about Kazaam Company in Problem 16-1A.
Required:
Prepare a complete statement of cash flows using a spreadsheet as in Exhibit 16A.1; report its operating activities using the indirect method. Identify the debits and credits in the Analysis of hanges
columns with letters that correspond to the following list of transactions and events:
a. Net income is $73,750.
b. Accounts receivable increased.
c. Merchandise inventory increased.
d. Prepaid expenses decreased.
e. Accounts payable decreased.
f. Depreciation expense is $18,750.
g. Sold equipment costing $46,875, with accumulated depreciation of $28,125, for $13,625 cash. This yielded a loss of $5,125.
h. Purchased equipment costing $96,375 by paying $25,000 cash and (i.) by signing a long-term note payable for the balance.
j. Borrowed $3,750 cash by signing a short-term note payable.
k. Paid $31,375 cash to reduce the long-term notes payable.
l. Issued 2,500 shares of common stock for $18 cash per share.
m. Declared and paid cash dividends of $62,125.
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