Problem 16-1A

Part 1

KAZAAM COMPANY
Statement of Cash Flows
For Year Ended December 31, 2005
Cash flows from operating activities

Net income

/ $73,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accounts receivable ($65,000 - $49,625) / (15,375)
Increase in inventory ($273,750 - $252,500) / (21,250)
Decrease in prepaid expenses ($6,250 - $5,375) / 875
Decrease in accounts payable ($116,625 - $88,125) / (28,500)
Depreciation expense / 18,750
Loss on disposal of equipment / 5,125
Net cash provided by operating activities / $ 33,375
Cash flows from investing activities
Cash received from sale of equipment / 13,625
Cash paid for equipment / (25,000)
Net cash used in investing activities / (11,375)
Cash flows from financing activities
Cash borrowed on short-term note / 3,750
Cash paid on long-term note / (31,375)
Cash received from issuing stock (2,500 x $18) / 45,000
Cash paid for dividends / (62,125)
Net cash used in financing activities / (44,750)
Net decrease in cash / $(22,750)
Cash balance at beginning of 2005 / 76,625
Cash balance at end of 2005 / $ 53,875

Noncash investing and financing activities

Purchased equipment for $96,375 by signing a $71,375 long-term note payable and paying $25,000 in cash.

Problem 16-1A (Concluded)

Part 2

Kazaam Company's operations provide a positive net cash inflow of $33,375—a good result. At the same time, the cash balance decreased by $22,750 (30%) during the year. Two major cash outflows are the retirement of debt ($31,375) and the dividend payment ($62,125), which together represent 127% of net income. Also, the $25,000 cash investment in equipment is presumably necessary to replace the older equipment sold.

Helping fund these cash outflows is $45,000 cash from issuance of stock. Moreover, the company took on additional debt (a 73% increase in indebtedness); namely, $71,375 in long-term notes. The company must recognize that that the debt must eventually be repaid with interest.

In summary, perhaps the company should review the wisdom of paying cash dividends that are considerably larger than cash provided from operations, especially when the payment also results in a deteriorating cash position and when the company is taking on additional debt.

Problem 16-3AA

KAZAAM COMPANY
Spreadsheet for Statement of Cash Flows
For Year Ended December 31, 2005
December
31, 2004 / Analysis of Changes / December
31, 2005
Debit / Credit
Balance sheet—debits
Cash / $ 76,625 / $ 53,875
Accounts receivable / 49,625 / (b) / $15,375 / 65,000
Merchandise inventory / 252,500 / (c) / 21,250 / 273,750
Prepaid expenses / 6,250 / (d) / $ 875 / 5,375
Equipment / 110,000 / (h) / 96,375 / (g) / 46,875 / 159,500
$495,000 / $557,500
Balance sheet--credits
Accum. depreciation—Equip. / $ 44,000 / (g) / 28,125 / (f) / 18,750 / $ 34,625
Accounts payable / 116,625 / (e) / 28,500 / 88,125
Short-term notes payable / 6,250 / (j) / 3,750 / 10,000
Long-term notes payable / 53,750 / (k) / 31,375 / (i) / 71,375 / 93,750
Common stock, $5 par value / 156,250 / (l) / 12,500 / 168,750
Contributed capital in excess of
par value, common stock / 0 / (l) / 32,500 / 32,500
Retained earnings / 118,125 / (m) / 62,125 / (a) / 73,750 / 129,750
$495,000 / $557,500
Statement of cash flows
Operating activities
Net income / (a) / 73,750
Increase in accts. receivable / (b) / 15,375
Increase in merch. inventory / (c) / 21,250
Decrease in prepaid expenses / (d) / 875
Decrease in accounts payable / (e) / 28,500
Depreciation expense / (f) / 18,750
Loss on sale of equipment / (g) / 5,125
Investing activities
Receipt from sale of equipment / (g) / 13,625
Payment to purchase equipment / (h) / 25,000
Financing activities
Borrowed on short-term note / (j) / 3,750
Payment on long-term note / (k) / 31,375
Issued common stock for cash / (l) / 45,000
Payments of cash dividends / (m) / 62,125
Noncash investing and financing activities
Purchase of equip. financed
by long-term note payable /
(i) /
71,375 /
(h) /
71,375
/ $515,375 / $515,375

BTN 16-1

1. Krispy Kreme uses the indirect method of reporting operating cash flows.

2.  Krispy Kreme did not pay dividends in 2002 and 2003. In fiscal year 2001 the cash provided by operations exceeded the cash dividend payment. In 2001, the cash provided by operating activities was $32,112,000 and the cash paid for dividends was $7,005,000.

3. In 2003, the largest item in reconciling the difference between net income and cash flow from operations was the tax benefit from the exercise of nonqualified stock options of $13,795,000.

In 2002, the largest item in reconciling the difference between net income and cash flow from operations was the increase in receivables of $13,317 thousand.

In 2001, the largest item in reconciling the difference between net income and cash flow from operations was the increase in accrued expenses of $7,966 thousand.

4.  For 2003 ($ thousands): The largest amount among the investing activities is the cash outflow for additions to property and equipment of $83,196. The next largest investing activity cash outflow is for the purchase of investments, $32,739. The largest investing activity cash inflow is for the sale of investments, $33,097.

The largest cash outflow from financing activities during 2003 is the $2,170 repayment of long-term debt.

The largest cash inflow among financing activities is the $44,234 borrowings of long-term debt.

For 2002 ($ thousands): The largest amount among the investing activities is the cash outflow for additions to property and equipment of $37,310. There were no cash outflows from financing activities. The largest cash inflow among financing activities is the $17,202 in proceeds from the stock offering.