Question

Gazelle Corporation, a merchandiser, recently completed its calendar-year 2015 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. GAZELLE CORPORATION Comparative Balance Sheets December 31, 2015 and 2014 2015 2014AssetsCash $123,450 $61,550Accounts receivable 77,100 80,750Inventory 240,600 250,700Prepaid expenses 15,100 17,000Total current assets 456,250 410,000Equipment 262,250 200,000Accum. depreciation—Equipment (110,750) (95,000)Total assets $607,750 $515,000Liabilities and EquityAccounts payable $17,750 $102,000Short-term notes payable 15,000 10,000Total current liabilities 32,750 112,000Long-term notes payable100,000 77,500Total liabilities 132,750 189,500EquityCommon stock, $5 par 215,000 200,000Paid-in capital in excessof par, common stock 30,000 0Retained earnings 230,000 125,500Total liabilities and equity$607,750 $515,000 GAZELLE CORPORATION Income Statement For Year Ended December 31, 2015Sales $1,185,000Cost of goods sold 595,000Gross profit 590,000Operating expensesDepreciation expense $38,600Other expenses 362,850Total operating expenses 401,450 188,550Other gains (losses)Loss on sale of equipment (2,100)Income before taxes 86,450Income taxes expense 28,350Net income $158,100Additional Information on Year 2015 TransactionsA. The loss on the cash sale of equipment was $2,100 (details in b).B. Sold equipment costing $51,000, with accumulated depreciation of $22,850, for $26,050 cash.C. Purchased equipment costing $113,250 by paying $43,250 cash and signing a long-term note payable for the balance.D. Borrowed $5,000 cash by signing a short-term note payable.E. Paid $47,500 cash to reduce the long-term notes payable.F. Issued 3,000 shares of common stock for $15 cash per share. G. Declared and paid cash dividends of $53,600.Required1. 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 dividend payment.

Answer 1

Gazelle Corporation

1. Statement of Cash Flows

Operating Activities:

Net income $158,100

Non-cash expenses:

Loss on sale of equipment 2,100

Depreciation expense 38,600

Working capital changes:

Accounts receivable $3,650

Inventory 10,100

Prepaid expenses 1,900

Accounts payable -84,250

Short-term notes payable 5,000

Net cash flow from

operating activities $135,200

Investing activities:

Purchase of equipment -62,250

Net cash flow from investing ($62,250)

Financing activities:

Cash from Common Stock 45,000

Long-term notes payable 22,500

Dividends -53,600

Net cash from financing $13,900

Net cash flows $86,850

2. A closer look shows that the company should not have paid the dividends when it also went back to the shareholders for more financing, thereby diluting their shareholding.

Step-by-step explanation:

a) Data and Analysis:

GAZELLE CORPORATION

Comparative Balance Sheets

December 31, 2015 and 2014

2015 2014 Cash Flows

Assets

Cash $123,450 $61,550

Accounts receivable 77,100 80,750 $3,650

Inventory 240,600 250,700 10,100

Prepaid expenses 15,100 17,000 1,900

Total current assets 456,250 410,000

Equipment 262,250 200,000 -62,250

Accum. depreciation—Equipment (110,750) (95,000)

Total assets $607,750 $515,000

Liabilities and Equity

Accounts payable $17,750 $102,000 -$84,250

Short-term notes payable 15,000 10,000 5,000

Total current liabilities 32,750 112,000

Long-term notes payable 100,000 77,500 22,500

Total liabilities 132,750 189,500

Equity

Common stock, $5 par 215,000 200,000 15,000

Paid-in capital in excess of par,

common stock 30,000 0 30,000

Retained earnings 230,000 125,500

Total liabilities and equity $607,750 $515,000

GAZELLE CORPORATION

Income Statement

For Year Ended December 31, 2015

Sales $1,185,000

Cost of goods sold 595,000

Gross profit 590,000

Operating expenses

Depreciation expense $38,600

Other expenses 362,850

Total operating expenses 401,450

Operating income 188,550

Other gains (losses)Loss on sale of equipment (2,100)

Income before taxes 186,450

Income taxes expense 28,350

Net income $158,100

a and b) Cash of sale of equipment $43,250 Loss on Cash Sale of Equipment $2,100

c) Equipment $113,250 Cash $43,250 Long-term note payable $70,000

d) Cash $5,000 Short-term note payable $5,000

e) Long-term note payable $47,500 Cash $47,500

f) Cash $45,000 Common Stock $45,000

g) Dividends $53,600 Cash $53,600