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.

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.

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

c is the correct answer.