Question

A comparative balance sheet for Monty Corporation is presented as follows. Assets Cash Accounts receivable Inventory Land Equipment Accumulated Depreciation-Equipment Total Liabilities and Stockholders' Equity Accounts payable Bonds payable Common stock ($1 par) Retained earnings Total December 31 2020 2019 $ 72,700 $ 22,000 83,780 68,080 181,780 191,080 72,780 112,080 261,780 202,080 (70,780) (44,080) $602,040 $551,240 $ 35,780 $ 49,080 150,000 200,000 214,000 164,000 202,260 138,160 $602,040 $551,240 Additional information: 1. Net income for 2020 was $128,560. No gains or losses were recorded in 2020. 2. Cash dividends of $64,460 were declared and paid. 3. Bonds payable amounting to $50,000 were retired through issuance of common stock.

Answer 1

		Monty corporation
		Statement of cash flows
	For the year ended December 31,2020
					$	$
Operating activities:
Net income		(Profit for the year)				128560
Adjustments to reconcile net income to
Depreciation expense			(Note:1)		26700
Increase in accounts receivable			(83780-68080)		-15700
Increase in inventory			(191080-181780)		9300
Decrease in accounts payable			(49080-35780)		-13300	7000
Cash flow from operating activities				a		135560
Investing activities:
Purchase of equipment			(261780-202080)		-59700
Sale of land			(112080-72780)		39300
Cash flow from investing activities				b		-20400
Financing activities:
Dividend paid					-64460
Cash flow from financing activities				c		-64460
Net increase in cash				a+b+c		50700
Add:Beginning balance of cash						22000
Ending balance of cash						72700

Note:1
Depreciation expense=Ending balance of accumulated depreciation-Beginning balance of accumulated depreciation=70780-44080=$ 26700
Common stock issued=Increase in common stock=214000-164000=$ 50000
Bonds retired=Decrease in bonds payable=200000-150000=$ 50000
Issued common stock to retire $ 50000 of bonds outstanding
Current cash debt coverage ratio=Net cash provided by operating activities/Average current liabilities
Average current liabilities=(Beginning current liabilities+Ending current liabilities)/2
Beginning current liabilities=Accounts payable for 2019=$ 49080
Ending current liabilities=Accounts payable for 2020=$ 35780
Average current liabilities=(49080+35780)/2=$ 42430
Current cash debt coverage ratio=135560/42430=$ 3.19
Cash debt coverage ratio=Net cash provided by operating activities/Average total liabilities
Average total liabilities=(Beginning total liabilities+Ending total liabilities)/2
Beginning total liabilities (2019):
		$
Accounts payable		49080
Bonds payable		200000
Total		249080
Ending total liabilities (2020):
		$
Accounts payable		35780
Bonds payable		150000
Total		185780
Average total liabilities=(249080+185780)/2=$ 217430
Cash debt coverage ratio=135560/217430=0.62
Free cash flow=Net cash provided by operating activities-Capital expenditures for the year
Capital expenditures for the year=Cash flow used in investing activities+Depreciation expense=20400+26700=$ 47100
Free cash flow=Net cash provided by operating activities-Capital expenditures for the year=135560-47100=$ 88460
Comment:
Monty has excellent liquidity.Its financial flexibility is good