For the year ending December 31, 2007, Chippendale Systems Inc. reported net income of $48,320 and paid dividends of $14,400. Comparative balance sheets as of December 31, 2007 and 2006 are as follows:

Instructions
1. Prepare a statement of cash flows, using the indirect method.
2. Why is depreciation added to net income in determining net cash flows from operating activities?Explain.

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Chippendale Systems Inc. Balance Sheets December 31 Changes 2007 2006 Increase (Decrease) Assets Current assets: Cash Accounts receivable Merchandise inventory Office supplies Prepaid insurance 42,360 60,864 49,720 384 120 $155,448 33,200 41,600 47,760 480 2,400 9,160 19,264 1,960 (96) 280 $30,008 Total current assets $125,440 Property, plant, and equipment: Land Store equipment Accumulated depreciation-store equipment Office equipment 16,000 21,680 (4,560) 12,456 $16,000 16,000 (2,080) 8,000 5,680 (2,480) 4,456 Accumulated depreciation-office equipment 776) 84) 1992) 5,664 535,672 Total property, plant, and equipment 41,800 $197,248 $36,136 161,576 Total assets Liabilities Current liabilities: Accounts payable Notes payable (current portion) Salaries payable Unearned rent 17,936 4,000 912 1,440 24,288 $ 11,416 4,000 1,200 1,920 S18,536 6,520 0 (288) (480) S 5,752 Total current liabilities Long-term liabilities: 20,000 4,000) 1,752 Notes payable (final payment due 2012) 16,000 40,288 Total liabilities 38,536 Stockholders Equity Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity S 20,000 136,960 $156,960 20,000 103,040 33,920 533,920 5161,576 35,672 123,040 $197 248