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.
KITE CORPORATION
Comparative Balance Sheets
December 31,2011 and 2010
2011
Assets
Cash 136500
Accounts receivable 74,100
Merchandise inventory 454,500
Prepaid expenses 17,100
Equipment 278,250
Accumdepreciation—Equipment -108,750
Total assets 851700
Liabilities and Equity
Accounts payable 117450
Short-term notes payable 17,250
Long-term notes payable 112,500
Common stock, $5 par 465,000
Paid-in capital in excess
of par, common stock 18,000
Retained earnings 121,500
Total liabilities and equity 851700

KITE CORPORATION
Income Statement
For Year Ended December 31, 2011
Sales $1,083,000
Cost of goods sold
Gross profit
Operating expenses
Depreciation expense $36,600

Other expenses 392,850

Total operating expenses

Other gains (losses)

Loss on sale of equipment
Income before taxes
Income taxes expense
Net income
Additional Information on Year 2011 Transactions
a. The loss on the cash sale of equipment was $2,100 (details in b).
b. Sold equipment costing $51,000, with accumulated depreciation of $20,850, for $28,050 cash.
c. Purchased equipment costing $113,250 by paying $38,250 cash and signing a long-term note payable for the balance.
d. Borrowed $6,000 cash by signing a short-term note payable.
e. Paid $45,000 cash to reduce the long-term notes payable.
f. Issued 3,000 shares of common stock for $11 cash per share.
g. Declared and paid cash dividends of $63,000.
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 d
 Answer 1
Cash flow Statement
Cash flow from Operating Activities
2010 Net Income
add: loss on sale of equipment
71550 64950 add: Depreciation
90,750 -16650 add: Decrease in Accounts Receivable
490,200 -35700 add: Decrease in Merchandise Inventory
19,200 -2100 add: Decrease in Prepaid Expenses
216,000 62250 less: Decrease in Accounts Payable
-93,000 -15750 add: Increase in Short term notes payable
794700 57000

123450 -6000 Cash flow from Investing Activities

11,250 6000 Sale of Equipment
82,500 30000 Purchase of Equipment
450,000 15000
Cash flow from Financing Activities
0 18000 Payment of Long term notes
127,500 -6000 Issue of Common Stock
794700 57000 Dividends paid

Net Change in Cash

add:Beginning Cash
Ending Cash
$1,083,000 Non Cash investing activity
585,000 Purchase of equipment by signing a long-term note payable for $ 75,000
498,000
Answer 2

The Corporation has earned $ 150,150 from the operations and $ 10,200 has
been used in Investing Activities and $ 75,000 has been used in Financing
Activities.
$ 63,000 paid by way of Dividends is the major amount used in terms of
financing activities.
429,450
68,550

2,100
66,450
9,450
 $57,000

payable for the balance.

the wisdom of the cash dividend payment.

$ 57,000
$ 2,100
$ 36,600
$ 16,650
$ 35,700
$ 2,100
$ 6,000
$ 6,000 $ 150,150

$ 28,050
$ -38,250 $ -10,200

$ -45,000
$ 33,000
$ -63,000 $ -75,000

$ 64,950
$ 71,550
$ 136,500