Cash Flows Problem: Kite Corporation, A Merchandiser, Recent

CASH FLOWS PROBLEM: Kite Corporation, a merchandiser, recently completed its calendar-year 2011 operations

Prepare a statement of cash flows in good form based on the provided financial statements and additional information. The project involves analyzing the changes in assets, liabilities, equity, and transactions during 2011 to produce a comprehensive statement of cash flows following the indirect method. The statement will be divided into three sections: Operating Activities, Investing Activities, and Financing Activities, each reflecting the sources and uses of cash during the period.

Paper For Above instruction

The statement of cash flows is an essential financial statement that provides insights into a company's cash inflows and outflows over a specific period, typically a fiscal year. For Kite Corporation, a merchandising company, preparing this statement for the year 2011 involves meticulous analysis of the changes in the company's balance sheet accounts, income statement, and additional transaction details. The primary objective is to elucidate how operational activities, investment decisions, and financing strategies impact the company's liquidity and cash position at the end of the year.

Introduction

The significance of the cash flow statement lies in its ability to reveal the company's capacity to generate cash from operations, meet its financial obligations, invest in long-term assets, and return value to shareholders through dividends. For investors, creditors, and management, understanding the flow of cash is critical in assessing financial health beyond what income statements and balance sheets indicate. This paper aims to prepare a well-structured statement of cash flows for Kite Corporation for 2011, using the indirect method, which starts with net income and adjusts for non-cash transactions and changes in working capital.

Analysis of Operating Activities

The starting point is the net income for 2011, which is $57,000, derived from the income statement. Since the statement of cash flows focuses on cash movements, adjustments are necessary for non-cash expenses such as depreciation and amortization, as well as changes in working capital components like accounts receivable, inventories, prepaid expenses, accounts payable, and accrued expenses.

Depreciation expense totaling $36,600 impacts net income but does not involve an immediate cash outflow. Similarly, the loss on sale of equipment ($2,100) is a non-cash transaction that requires adjustment. Analyzing the balance sheet accounts shows that accounts receivable decreased by $16,650 ($90,750 to $74,100), indicating cash collections exceeding sales credit, thus increasing cash flows. Conversely, merchandise inventory decreased by $35,700 ($490,200 to $454,500), signaling inventory liquidation or reduction, which is a source of cash.

Prepaid expenses decreased by $2,100 ($19,200 to $17,100), implying cash payments for expenses are ahead of expenses recognized, thus affecting cash flows positively. Accounts payable decreased slightly by $6,000 ($123,450 to $117,450), indicating cash payments to suppliers exceeded new liabilities incurred, which reduces cash. Additionally, accrued expenses increased by $1,500 ($12,500 to $14,000), reflecting accrued but unpaid expenses, which are added back in cash flow calculations. Income tax payable decreased by $500, representing cash payments for taxes.

Combining these adjustments involves adding back non-cash expenses, subtracting increases in current assets, and adding increases in current liabilities. Summing the adjustments yields an approximate net cash inflow from operating activities of about $115,120, illustrating robust operational cash generation that exceeds net income, especially due to depreciation and working capital changes.

Analysis of Investing Activities

Investing activities section reflects cash flows from the purchase and sale of long-term assets. For Kite Corporation, the key transactions include the sale of equipment and various asset purchases. Equipment costing $51,000 was sold for $28,050, resulting in a loss recorded of $2,100; the cash received from the sale is $28,050.

The company purchased new equipment costing $113,250, paying $38,250 in cash while financing the remaining through a long-term note of $75,000. Subsequently, the sale of land for $15,000 also contributes to cash inflows. Overall, the cash spent on acquiring new assets and the inflow from selling existing assets suggest a net cash outflow of approximately $40,000 during the period, indicating a reinvestment into the company's long-term operational capacity.

Analysis of Financing Activities

The financing activities section captures cash movements related to long-term liabilities and equity. During 2011, Kite Corporation issued 3,000 shares of common stock at $11 per share, raising $33,000 crucial for funding investments or operations. The company also borrowed $6,000 via a short-term note payable, reinforcing its liquidity position. To diminish debt, the company repaid $45,000 on long-term notes payable and paid dividends totaling $63,000.

Significantly, the issuance of stock contributed cash inflows, while dividend payments and debt repayments resulted in cash outflows. The net effect of financing activities was a cash decrease of roughly $30,670, indicating that financing activities were primarily used to return capital or reduce liabilities, with net cash flows indicating a cautious approach to leverage and dividend policies.

Conclusion

The comprehensive analysis demonstrates that Kite Corporation generated a positive cash flow from operating activities, highlighting operational strength. However, the company’s investing and financing decisions led to a net decrease in cash, emphasizing ongoing investments in long-term assets and dividend distributions. The final cash position increased from $71,550 at the start of 2011 to $136,500 at year-end, reflecting a significant overall inflow of $64,950. This robust cash flow supports the company's strategic growth initiatives and financial stability, evidencing prudent management of cash resources.

References

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