Question

Kate has just completed her first year running Kate's Cards. She has been preparing monthly income statements and balance sheets, so she knows that her company has been profitable and that there is cash in the bank. She has not, however, prepared a statement of cash flows. Kate's provides you with the year-end income statement and balance sheet and asks that you prepare a statement of cash flows for Kate's Cards.

Additional information:

1. There were no disposals of equipment during the year

2. Dividends in the amount of $1,300 were paid in cash during the year.

3. Prepaid expenses relate to operating expenses.

Required

a. Prepare a statement of cash flows for Kate's Cards for the year-ended August 31, 2019, using the indirect method. Hint: Since this was Kate's first year of operations, the beginning balance sheet account balances were zero.

b. Prepare a statement of cash flows for Kate's Cards for the year ended August 31, 2019, using the direct method.

   KATE'S CARDS

Income Statement

Year Ended August 31,2019

Sales Revenue...……………………………………………………………...............……………$185,000

Cost of Goods Sold...…………………………………………………………………………………106,000

Gross profit...…………………………………………………………………………………………….79,000

Operating Expenses

Wages...………………………………………………………………………………………………….18,000

Consulting...……………………………………………………………………………………………..11,850

Insurance...……………………………………………………………………………………………......1,200

Utilities..........................................................................................................................................2,400

Rent.............................................................................................................................................14,400

Depreciation...............................................................................................................................3, 250

Total Operating Expense............................................................................................................51,100

Income from Operations.............................................................................................................27,900

Interest Expense..............................................................................................................................900

Income before income tax..........................................................................................................27,000

Income tax expense....................................................................................................................5,400

Net Income...............................................................................................................................$21,600

KATE'S CARDS

   Balance Sheet

   As of August 31, 2019

Assets

Current assets

Cash.......................................................................................................................................$17,400

Accounts receivable...............................................................................................................11,000

Inventory................................................................................................................................16,000

Prepaid insurance.................................................................................................................1,000

Total Current Assets...............................................................................................................45,400

Equipment............................................................................................................................17,500

Accumulated Depreciation...................................................................................................(3,250)

Total Assets........................................................................................................................$59,650

Liabilities

Current Liabilities

Accounts Payable .................................................................................................................$6,200

Unearned revenue...................................................................................................................1,250

Other Current liabilities............................................................................................................1,900

Total Current Liabilities...........................................................................................................9,350

Note Payable........................................................................................................................15,000

Total Liabilities.....................................................................................................................24,350

Stockholders' equity

Common Stock........................................................................................................................500

Additional paid-in-capital......................................................................................................9,500

Preferred Stock...................................................................................................................5,000

Retained Earnings..............................................................................................................20,300

Total Stockholders' equity....................................................................................................35,300

Total liabilities and stockholders' equity..............................................................................$59,650

Answer 1