Statement of cash flows (indirect method) accounting PLEASE HELP!!?

Question

I do not understand this at all!!! Please help me!!

Kazaam Company, a merchandiser, recently completed its calendar-year 2005 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. Kazaam’s balance sheets and income statement follow:

KAZAAM COMPANY

Comparative Balance Sheets

December 31, 2005

2005 2004

Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,875 $ 76,625

Accounts receivable . . . . . . . . . . . . . . . . . 65,000 49,625

Merchandise inventory . . . . . . . . . . . . . . . 273,750 252,500

Prepaid expenses . . . . . . . . . . . . . . . . . . . 5,375 6,250

Equipment . . . . . . . . . . . . . . . . . . . . . . . . 159,500 110,000

Accum. depreciation—Equipment . . . . . . . . (34,625) (44,000)

Total assets . . . . . . . . . . . . . . . . . . . . . . . $522,875 $451,000

Liabilities and Equity

Accounts payable . . . . . . . . . . . . . . . . . . . $ 88,125 $116,625

Short-term notes payable . . . . . . . . . . . . . 10,000 6,250

Long-term notes payable . . . . . . . . . . . . . 93,750 53,750

Common stock, $5 par value . . . . . . . . . . 168,750 156,250

Contributed capital in excess

of par, common stock . . . . . . . . . . . . . . 32,500 0

Retained earnings . . . . . . . . . . . . . . . . . . . 129,750 118,125

Total liabilities and equity . . . . . . . . . . . . . $522,875 $451,000

KAZAAM COMPANY

Income Statement

For Year Ended December 31, 2005

Sales . . . . . . . . . . . . . . . . . . . . . . . . . $496,250

Cost of goods sold . . . . . . . . . . . . . . 250,000

Gross profit . . . . . . . . . . . . . . . . . . . . 246,250

Operating expenses

Depreciation expense . . . . . . . . . . . $ 18,750

Other expenses . . . . . . . . . . . . . . . 136,500 155,250

Other gains (losses)

Loss on sale of equipment . . . . . . . 5,125

Income before taxes . . . . . . . . . . . . . . $ 85,875

Income taxes expense . . . . . . . . . . . . 12,125

Net income . . . . . . . . . . . . . . . . . . . . $ 73,750

Answer 1

Indirect Method Cash Flow Statement

Cash flows from operating activities

Net income $73,750

Adjustments for:

Depreciation $18,750

Loss on sale of equipment $5,125

Sub-total $97,625

Increase in accounts receivable ($15,375)

Increase in inventories ($21,250)

Decrease in prepayments $875

Decrease in accounts payable ($28,500)

Increase in short-term notes payable $3,750

Net cash from operating activities $37,125

Cash flows from investing activities

Purchase of equipment (net of sales proceeds) $82,750*

Net cash used in investing activities ($82,750)

Cash flows from financing activities

Proceeds from issue of share capital $45,000

Proceeds from long-term notes payable $40,000

Dividends paid ($62,125)

Net cash from financing activities $22,875

Net decrease in cash and cash equivalents ($22,750)

CCE at beginning of period $76,625

CCE at end of period $53,875

* this should not be shown net like this, but your question doesn't give the cost of the new assets purchased or the proceeds of assets sold, so I had to net them off.