MONTGOMERY INC. Comparative Balance Sheets
December 31
Current Year Prior Year
Assets
Cash $ 30,800 $ 31,000
Accounts receivable, net 8,900 10,900
Inventory 79,800 63,000
Total current assets 119,500 104,900
Equipment 44,200 37,300
Accum. depreciation—Equipment (19,900) (13,800)
Total assets $ 143,800 $ 128,400
Liabilities and Equity
Accounts payable $ 21,200 $ 22,900
Salaries payable 400 500
Total current liabilities 21,600 23,400
Equity
Common stock, no par value 102,400 94,100
Retained earnings 19,800 10,900
Total liabilities and equity $ 143,800 $ 128,400
MONTGOMERY INC.
Income Statement
For Current Year Ended December 31
Sales $ 38,500
Cost of goods sold (16,000)
Gross profit 22,500
Operating expenses
Depreciation expense $ 6,100
Other expenses 4,700
Total operating expense 10,800
Income before taxes 11,700
Income tax expense 2,800
Net income $ 8,900
Additional Information on Current-Year Transactions
1. No dividends are declared or paid.
2. Issued additional stock for $8,300 cash.
3. Purchased equipment for cash; no equipment was sold.
Use the above information to prepare a statement of cash flows for the current year using the indirect method. (A

Montgomery Inc.

Statement of Cash Flow, using the indirect method:

Net income                                     $ 8,900

adjusting non-cash expense:

Depreciation                                      6,100

Net Cash from operations           $15,000

Add: Working Capital:

Accounts receivable                      (2,000)

Inventory                                       (16,800)

Accounts Payable                           (1,700)

Salaries payable                                (100)

Cash from operating activities   ($5,600)

Investing Activities:

Purchase of Equipment                (6,900)

Financing Activities:

Issue of additional stock               8,300

Net cash flow                              $4,200

Explanation:

MONTGOMERY INC.  Comparative Balance Sheets

December 31

                                                 Current Year     Prior Year

Assets

Cash                                              $ 30,800           $ 31,000

Accounts receivable, net                   8,900              10,900

Inventory                                          79,800              63,000

Total current assets                        119,500            104,900

Equipment                                        44,200              37,300

Accum. depreciation: Equipment   (19,900)             (13,800)

Total assets                                 $ 143,800          $ 128,400

Liabilities and Equity

Accounts payable                         $ 21,200          $ 22,900

Salaries payable                                   400                   500

Total current liabilities                     21,600             23,400

Equity

Common stock, no par value       102,400              94,100

Retained earnings                          19,800               10,900

Total liabilities and equity         $ 143,800         $ 128,400

MONTGOMERY INC.

Income Statement  

For Current Year Ended December 31

Sales                              $ 38,500

Cost of goods sold          (16,000)

Gross profit                      22,500

Operating expenses

Depreciation expense    $ 6,100

Other expenses                 4,700

Total operating expense 10,800

Income before taxes        11,700

Income tax expense         2,800

Net income                    $ 8,900

b) The indirect method of preparing the statement of cash flows starts with the net income and uses the balances in the balance sheet to determine if they are net cash outflows or inflows.

answer; intensive use of a sales force and is relatively costly;