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
Proceeds from sale of equipment $13,625
Purchase of equipment ($25,000)

Net cash used in investing activities ($11,375)

Cash flows from financing activities
Proceeds from issue of share capital $45,000
Repayment of long-term notes payable ($31,375)
Dividends paid ($62,125)

Net cash used in financing activities ($48,500)

Net decrease in cash and cash equivalents ($22,750)
CCE at beginning of period $76,625
CCE at end of period $53,875

Note: Equipment costing $71,375 were paid for by the signing of a long-term note payable.

2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment.
The company’s AR has increased while its AP has decreased. Effectively this means that it’s financing its debtors, which is not very clever. In addition, its COGS for a whole year was only $250,000, but it has $273,750 in ending inventory, i.e. it’s holding more than a year’s sales in inventory. It has tied up much of its funds in inventory. It already does not have sufficient cash, thereby causing it to borrow via short- and long-term notes payable (and incurring interest expense) and yet it saw fit to pay a dividend. Not very clever is an understatement.