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.

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