Question

Bernadette Adams, the president of Adams Print Gallery, Inc., is examining the income statement for 2018, which has just been handed to her by her accountant, Jason Rosenberg, CPA. After looking at the statement, Ms. Adams says to Mr. Rosenberg, “Jason, the statement seems to be well done, but what I need to know is why I don't have enough cash to pay my bills this month. You show that I have earned $60,000 in 2018, but I only have $12,000 in the bank. I know I bought a building on a mortgage and paid a cash dividend of $24,000, but what else is going on?" Mr. Rosenberg replies, “To answer your question, Bernadette, we have to look at comparative balance sheets and prepare another type of statement. Here, take a look at these balance sheets.' The income statement and comparative balance sheets handed to Ms. Adams follow. Adams Print Gallery, Inc. Income Statement For the Year Ended 12/31/2018 $442,000 254,000 $188,000 Net Sales Cost of Goods Sold Gross Margin Operating Expenses (including Depreciation) Expense of $10,000 Operating Income Other Income (Expense) Interest ($12,000) Income Before Income Taxes Income Taxes Net Income 102,000 $86,000 -12,000 $74,000 14,000 $60,000 Additional Information taken from the Company's Records: Building purchased for $200,000 with a Mortgage of $200,000 b. Dividends paid of $24,000 a

Answer 1

Adams Print Gallery, Inc Change Increase or Decrease Source or Use 2017 Comparative Balance Sheet for 2018 and 2017 2018 Current Assets Cash $12,000 Accounts receivable (net) $89,000 Inventory $120,000 Prepaid expenses $5,000 Total Current assets $20,000 -$8,000 Decrease $73,000 $16,000 Increase $90,000 $30,000 Increase $7,000 -$2,000 Decrease Use Use Source Investments Buildings Accumulated Depreciation Total Assets $200,000 -$10,000 $416,000 $200,000 Increase $0 $10,000 Increase $190,000 Use Source $37,000 $48,000 $11,000 Decrease Use Liabilities Current Liabilities Accounts payable Accrued liabilities Income taxes payable Total Current liabilities $3,000 $1,000 Increase Source $2,000 $50,000 $40,000 Long term liabilities Mortgage payable Total Liabilities Source $200,000 $240,000 $0 $200,000 Increase $50,000 $100,000 $100,000 $0 None None Stockholders' Equity Common stock Paid in capital in excess of par value Retained earnings Total liabilities and Stockholders' Equity $36,000 Increase Source $76,000 $416,000 $0 $40,000 $190,000 $0 56 Another type of statement refers to the cash flow statement Cash flow statement is prepared on cash basis and it gives details of cash flow from operating, investing and financing activities. $60,000 57 Adams Print Gallery, Inc Statement of Cash flows (Indirect method) For the Year Ended December 31, 2018 Cash flows from Operating Activities Net Profit Adjustments to reconcile net profit to net cash provided by Operating Activities Depreciation expense, Buildings $10,000 Change in operating current assets and liabilities Increase in Accounts receivable $16,000 Increase in Inventory -$30,000 Decrease in prepaid expenses $2,000 Decrease in Accounts payable $11,000 Increase in income tax payable $1,000 -$44,000 $16,000 -$200,000 $200,000 Net Cash from Operating Activities Cash flows from Investing Activities Sale of Long term investments Purchase of Buildings Net Cash from Investing Activities Cash flows from Financing Activities Increase in Mortgage payable Cash dividend paid Net Cash from Financing Activities Net increase (decrease) in cash Cash balance at beginning of the year Cash balance at end of the year $200,000 -$24,000 $176,000 -$8,000 $20,000 $12,000 76 The cash problem is due to increase in current assets accounts receivable and inventory The increase in current assets decreases the cash flow from operating activities