Q1. Carla Limited had the following financial statements:

Carla Limited

Income Statement

For the Year Ended December 31, 2020

Net sales $165,000

Cost of goods sold 97,500

Gross profit 67,500

Operating expenses 27,500

Income from operations 40,000

Interest expense 3,500

Income before income taxes 36,500

Income taxes 11,000

Net income $ 25,500

Carla Limited.

Comparative Statement of Financial Position

As at December 31

2020 2019

Cash $15,000 $9,750

Accounts receivable 11,750 8,750

Inventories 16,500 11,750

Prepaid insurance 2,500 2,000

Equipment 25,500 33,500

Accumulated depreciationequipment (16,250) (17,750)

Total assets $55,000 $48,000

Accounts payable $5,000 $6,750

Wages payable 2,000 2,000

Income taxes payable 3,000 1,000

Long-term note payable 0 8,750

Common shares 15,000 15,000

Retained earnings 30,000 14,500

Total liabilities and shareholders equity $55,000 $48,000

Additional information:

• Equipment that cost $8,000 was sold for the carrying amount of $3,750.

• Dividends declared and paid were $10,000.

Required: Prepare the operating activities section of a statement of cash flows using the direct method.