For the year ending August 31, 2011, Gymboree Systems Inc. reported net income of $90,600 and paid dividends of $27,000. Comparative balance sheets as of August 31, 2011 and 2010, are as follows:

Instructions1. 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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GYMBOREE SYSTEMS INC. Balance Sheets August 31, Changes Increase (Decrease) 2010 2011 Assets Current assets: $ 79,425 $ 62,250 Cash $17,175 Accounts receivable 114,120 78,000 89,550 36,120 Merchandise inventory Office supplies Prepaid insurance 93,225 3,675 (180) (525) $56,265 720 900 3,975 $ 291,465 4,500 Total current assets $235,200 Property, plant, and equipment: Land $ 30,000 $ 30,000 Store equipment Accumulated depreciation-store equipment Office equipment Accumulated depreciation-office equipment Total property, plant, and equipment 10,650 (4,650) 40,650 30,000 (3,900) (8,550) 23,355 (7,080) 15,000 (3,345) 8,355 (3,735) $ 67,755 $302,955 $ 78,375 $ 369,840 $10,620 Total assets $66,885 Liabilities Current liabilities: $ 33,630 $ 21,405 7,500 Accounts payable Notes payable (current portion) Salaries payable Unearned rent $12,225 7,500 1,710 2,700 (540) (900) 2,250 3,600 $ 34,755 $ 45,540 Total current liabilities $10,785 Long-term liabilities: Notes payable (final payment due 2015) 30,000 $ 75,540 37,500 S 72,255 (7,500) $ 3,285 Total liabilities Stockholders' Equity $ 37,500 $ 37,500 193,200 $230,700 Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 63,600 $63,600 256,800 $ 294,300 $ 369,840 $302,955 $66,885