The comparative statement of financial positions and statement of profit or loss of Karvina Electronics Limited are as follows:

Karvina Electronics Limited

Statement of financial positions /Balance Sheets At 31 December 2017

2017 2016

$ $

Assets:

Cash 107,267 123,040

Accounts receivable 32,180 29,400

Merchandise inventory 383,125 61,710

Long-term investments 55,900 56,400

Equipment 275,500 145,500

Accumulated depreciation (33,550) (31,200)

Total assets 820,422 384,850

Liabilities:

Accounts payable 56,827 40,380

Income taxes payable 10,725 10,200

Bonds payable 48,750 66,000

Total liabilities 116,302 116,580

Equity:

Ordinary shares 130,000 105,000

Retained earnings 574,120 163,270

Total equity 704,120 268,270

Total liabilities and equity 820,422 384,850

Karvina Electronic Limited

Statement of profit or loss and other comprehensive income

For Year Ended 31 December 2017

Sales 890,000

Cost of goods sold 180,900

Depreciation expense (equipment) 29,400

Other operating expenses 48,000

Interest expense 2,000 (260,300)

Other gains (losses):

Loss on sale of equipment (8,400)

Income before taxes 621,300

Income taxes expense (27,650)

Net income 593,650

Additional information:

1 There was no gain or loss on the sales of the long-term investments, nor on the bonds retired.

2 Old equipment with an original cost of $37,550 was sold with a loss.

3 Additional ordinary shares were issued for cash.

Required:

a To prepare a statement of cash flows for the company for the year ended 31 December 2017 using the direct method. (Reconciliation by indirect method is not required.)

b Briefly explain why the net income of the company was positive but the cash flows of the company decreased in 2017.