CASH FLO W S P RO B LEM: Kite C o r p o rat i o n , a me r ch a nd iser, re c en

Question

CASH FLOWS PROBLEM:

Kite Corporation, 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. Prepare a statement of cash flows in good form.

Accumulated Depreciation                          $             (108,750.00)                          $           (93,000.00)       

Total Assets                                                       $              851,700.00                            $          794,700.00          

Retained Earnings                                           $              121,500.00                            $          127,500.00          

Total Liabilities & Equity                                $              851,700.00                            $          794,700.00          

Explanation / Answer

Paid in capital in excess of par is $35,250 and not $32,250; Retained Earnings is $183,225 and not $183,255.

Operating Activities
Net income 116,125
Adjustments for:
-- Depreciation 20,000
-- Loss on sale of equipment 5,625
Changes in working capital:
-- AR (10,830)
-- Inventory (25,000)
-- Prepaid exp. 350
-- AP (56,620)
Cash from op'g activities 49,650

Investing Activities
Purchase of equipment (25,000)
Proceeds from sale of equipment 11,500
Cash used in investing activities (13,500)

Financing Activities
Proceeds from S-T notes 2,000
Repayment of L-T notes (50,750)
Proceeds from share issue 47,000
Payment of dividends (59,000)
Cash used in financing activities (60,750)

Decrease in CCE (24,600)
CCE at beginning of year 74,000
CCE at end of year 49,400

Note: Equipment costing $97,500 was acquired by paying cash of $25,000 and signing a long-term note payable for the balance of $72,500.

The company was unwise to pay the dividend as it didn't have the cashflow to do it and effectively paid the dividend from borrowed funds.

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