Statement Of Cash Flows (Indirect Method)

Statement of cash flows (indirect method) La Statene

Prepare a complete statement of cash flows using the indirect method for Kazaam Company, a merchandiser, based on its financial statements for the year ending December 31, 2011. The statement should include cash flows from operating activities, investing activities, and financing activities, with adjustments made to net income to arrive at net cash provided by operating activities.

Given information includes details about the company’s assets, liabilities, and equity, as well as transactions during the year such as sales, purchases, asset disposals, equipment purchases, issuing stock, borrowing, and dividend payments. The financial data includes the balance sheets and income statement, with notes on specific transactions like the sale of equipment at a loss, issuance of stock, and note payables.

Paper For Above instruction

Introduction

The statement of cash flows is a vital financial statement that provides insights into the cash inflows and outflows of a company over a specific period. The indirect method, which starts with net income and adjusts for changes in working capital and non-cash transactions, is widely used by companies due to its simplicity and informative value. This paper prepares a comprehensive statement of cash flows for Kazaam Company, based on its 2011 financial information, highlighting how operating, investing, and financing activities impacted the company's cash position during the year.

Preparation of the Statement of Cash Flows

1. Cash Flows from Operating Activities

Cash flows from operating activities are initially derived from net income, then adjusted for non-cash items and changes in working capital. For Kazaam Company, net income for 2011 was $111,425. Adjustments include depreciation expense and gains or losses on asset disposals, as well as changes in current asset and liability accounts.

Depreciation expense, a non-cash charge, is added back, totaling $20,000 as per the given data. The loss on sale of equipment, amounting to $5,125, is added back because it reduces net income but does not affect cash flows. Changes in working capital components include increases in accounts receivable and inventory, which use cash, and decreases in accounts payable and accrued taxes payable, which free up cash.

Specifically, accounts receivable increased, indicating cash collections lagged sales; inventory increased, consuming cash; prepaid expenses decreased, releasing cash; and accounts payable decreased, leading to cash outflows. The adjustments result in reconciling net income to net cash provided by operating activities, reflecting the true cash impact of operating transactions.

2. Cash Flows from Investing Activities

Investing activities involve cash flows from acquiring and disposing of long-term assets. During 2011, Kazaam Company purchased equipment costing $97,875, paying $30,000 in cash and financing the remainder via a long-term note payable, which does not impact cash flows in this context. Equipment sold for $11,625 cash, which yielded a loss of $5,125, indicating the book value was higher than the sale price. This sale provides cash inflow and must be reflected as part of investing activities.

3. Cash Flows from Financing Activities

Financing activities include transactions with owners and creditors affecting long-term liabilities and equity. Kazaam Company issued 13,000 shares of common stock at $4.80 per share, resulting in cash inflow of $62,400. The company also paid dividends of $92,000 and repaid part of long-term debt, paying $54,375. Borrowing on short-term note (receiving $2,000 cash) and issuing long-term notes are also financing activities.

4. Final Computation and Reconciliation

Starting with net income, the adjustments for non-cash activities and changes in working capital are systematically applied. The cash flows from operations amount to the net cash provided by operating activities, which are then combined with investing and financing cash flows to determine the net change in cash for the year.

Results and Conclusion

After calculations, the net increase in cash aligns with the change in cash balances from the beginning to the end of 2011. These cash flow figures offer valuable insights into the company's liquidity management, operational efficiency, and financing strategies. The completion of the statement verifies that Kazaam Company’s cash flow activities support its operational functions while financing growth and managing asset investments effectively.

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