Solved by verified expert :Sol
Stein, certified public accountant, has just given his employer Sing Moy, the
president of Moy Print Gallery, Inc., the income statement that appears below
the page.
After
examining the statement, Moy said to Stein, “Sol, the statement seems to be well
done, but what I need is why I don’t have enough cash to pay my bills this
month. You show that I earned $120,000 in 2010, but I have only $24,000 in the
bank. I know I bought a building on a mortgage and paid a cash dividend of
$48,000, but what else is going on?”
Stein
replied, “To answer your question, we have to look at these balance sheets,”
The statement handed to Moy follows.
Moy Soy Gallery, Inc. Income
statement for the year ended December 31, 2010
Sales $884,000
Cost
of goods sold
508,000
Gross
margin
$376,000
Operating
expenses (including depreciation
204,000
Expenses
of $20,000
Operating
income
$172,000
Interest
expense
24,000
Income
before income taxes
$148,000
Income
taxes expense
28,000
Net
income
$120,000
Moy Print Gallery, Inc.
Comparative Balance Sheets December 31, 2010 &2009
2010 2009
Assets
Cash
$24,000
$40,000
Account
receivable (net) 178,000 146,000
Inventory
240,000
180,000
Prepaid
expenses
10,000 14,000
Building
400,000
–
Accumulated
depreciation (20,000) –
Total
assets
$832,000
$380,000
2010 2009
Liabilities and
Stockholders’ equity
Account
payable
$74,000
$96,000
Income
taxes payable
60,000
40,000
Mortgage
payable
400,000 –
Common
stock
200,000 200,000
Retained
earnings
152,000
80,000
Total
liabilities and stocks’ equity
$832,000 $380,000
1. To what other statement is
Stein referring? From the information given, prepare the additional statement
using the indirect method.
2. Moy Print Gallery, Inc.,
has a cash problem despite profitable operations. Why is this the case?
