Page 670 - Accounting Principles (A Business Perspective)

16. Analysis using the statement of cash flows

midyear dividend of USD 5,000 was paid, the company found it necessary to borrow USD 5,000 from its bank on a
two-year note. Further borrowing may be needed since the Cash account is dangerously low at year-end.
Following are the income statement and "cash flow statement", as the company's accountant calls it, for 2011.

National sports, Inc.
Income Statements
For the year ended 2011 December 31
Sales $195,000
Cost of goods sold $140,000
Operating expense and taxes 49,700 189,700
Net income $5,300
National Sports, Inc.
Cash flow Statement
For the Year ended 2011 December 31
Cash received:
From operations:
Net income $5,300
Depreciation 5,000
Total cash from $10,300
operations
Note issued to back 5,000
Mortgage note issued 16,000
Total funds provided $31,300
Cash paid:
New equipment $23,000
Dividends 5,000 28,000
Increase in cash $ 3,300
The company's president is very concerned about what he sees in these statements and how it relates to what he
knows has actually happened. He turns to you for help. Specifically, he wants to know why the cash flow statement
shows an increase in cash of USD 3,300 when he knows the cash balance decreased from USD 15,000 to USD 500

during the year. Also, why is depreciation shown as providing cash?
You believe you can answer the president's questions after receiving the following condensed balance sheet data:
National Sports, Inc.
Comparative Balance Sheets
2011 December 31, and 2010
December 31
2011 2010
Assets
Current assets:
Cash $ 500 $ 15,000
Accounts receivable, net 17,800 13,200
Merchandise inventory 28,500 17,500
Prepaid expenses 700 300
Total current assets $ 47,500 $ 46,000
Property, plant, and equipment:
Equipment $40,000 $35,000
Accumulated depreciation – equipment (11,000) (24,000)
Total property, plant, and equipment $ 29,000 $ 11,000
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 8,700 $ 10,000
Accrued liabilities payable 600 1,100
Total current liabilities $ 9,300 $ 11,100
Long-term liabilities:
Notes payable 5,000 -0-
Mortgage note payable 16,000 -0-
Total liabilities $ 30,300 $ 11,100
Stockholders' equity:
Common stock $ 40,000 $ 40,000
Retained earnings 6,200 5,900
Total stockholders' equity $ 46,200 $ 45,900
Total liabilities and stockholders' equity $ 76,500 $ 57,000

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