For the year ending December 31, 2007, Guru Systems Inc. reported net income of $241,600 and paid dividends of $72,000. 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. Under the indirect method, why is net income adjusted for changes in accruals anddeferrals?

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Guru Systems Inc Balance Sheets December 31 Changes 2007 2006 Increase (Decrease) Assets Current assets: Cash Accounts receivable Merchandise inventory Office supplies Prepaid insurance $211,800 166,000 45,800 96,320 9,800 (480) 12,0001400 $777,240 627,200 $150,040 304,320 208,000 248,600 238,800 2,400 1,920 Total current assets Property, plant, and equipment: 80,000 80,000 80,000 (10,400) 40,000 (8,920) Land Store equipment 108,400 Accumulated depreciation-store equipment (22,800) 62,280 Accumulated depreciation-office equipment (18880) 28,400 (12,400) 22,280 (9,960) Total property, plant, and equipt 209,000 180,680 28,320 986,240 807,880 178,360 Office equipment Total assets Liabilities Current liabilities: Accounts payable Notes payable (current portion) Salaries payable Unearned rent 20,000 6,000 7,2009.000 S121,440 92,680 89,680 20,000 4,560 57,080 32,600 0 (1,440) (2.400) 28,760 Total current liabilities Long-term liabilities: 00,000 20,000 S201,440 $192,680 $ 8,760 Notes payable (final payment due 2012) 80,000 Total liabilities Stockholders' Equity 100,000 $100,000S 684800 515.200 Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 169.600 615,200 169,600 986,240 $807,880 $178,360 $784,800