Question

Exercise 23-13

Monty Inc., a greeting card company, had the following statements prepared as of December 31, 2017.

MONTY INC. COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2017 AND 2016
		12/31/17			12/31/16
Cash		$6,100			$7,100
Accounts receivable		61,500			51,000
Short-term debt investments (available-for-sale)		34,800			17,900
Inventory		39,800			59,900
Prepaid rent		5,000			4,000
Equipment		155,200			129,900
Accumulated depreciation—equipment		(35,200	)		(24,800	)
Copyrights		45,800			49,800
Total assets		$313,000			$294,800
Accounts payable		$45,800			$39,800
Income taxes payable		4,100			6,000
Salaries and wages payable		7,900			3,900
Short-term loans payable		8,000			9,900
Long-term loans payable		60,100			68,900
Common stock, $10 par		100,000			100,000
Contributed capital, common stock		30,000			30,000
Retained earnings		57,100			36,300
Total liabilities & stockholders’ equity		$313,000			$294,800

MONTY INC. INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2017
Sales revenue				$338,200
Cost of goods sold				174,500
Gross profit				163,700
Operating expenses				120,800
Operating income				42,900
Interest expense		$11,400
Gain on sale of equipment		2,000		9,400
Income before tax				33,500
Income tax expense				6,700
Net income				$26,800

Additional information:

1.		Dividends in the amount of $6,000 were declared and paid during 2017.
2.		Depreciation expense and amortization expense are included in operating expenses.
3.		No unrealized gains or losses have occurred on the investments during the year.
4.		Equipment that had a cost of $20,200 and was 70% depreciated was sold during 2017.

Prepare a statement of cash flows using the direct method.

Answer 1

MONTY Inc. Statement of Cash Flows For the Year ended December 31,2017
Cash Flow from Operating Activities	$	$
Net Income		26,800
Adjustments to Reconcile net income to
Cash Flow from Operating Activities
Increase in Accounts receivable	(10,500)
Increase in Short term Investments	(16,900)
Decrease in Inventory	20,100
Increase in Prepaid Rent	(1,000)
Increase in Accounts Payable	6,000
Decrease in Income Tax Payable	(1,900)
Increase in Salaries and wages Payable	4,000
Decrease in Short term Loan Payable	(1,900)
		(2,100)
Adjusted Net Income		24,700
Add : Depreciation and Amortization expense	28,540
Interest Expense	11,400
Less : Gain on sale of equipment	(2,000)
		37,940
Net Cash Flow from Operating Activities (a)		62,640
Cash Flow from Investing Activities
Sale of equipment	8,060
Purchase of Equipment	(45,500)
Net Cash used in Investing Activities (b)		(37,440)
Cash Flow from Financing Activities
Dividends paid	(6,000)
Interest expense	(11,400)
Payment of long term loan	(8,800)
Net Cash used in Financing Activities (c)		(26,200)
Cash used during the year (a+b+c)		(1,000)
Cash Dec 31, 2016		7,100
Cash Dec 31,2017		6,100

Working Notes:-

1) Accumulated Depreciation A/c

Equipment A/c	$ 14,140	b/d	$ 24,800
		Depreciation A/c
		(bal. fig)	24,540
c/d	$ 35,200

2) Amortization Expense = Copyrights at the beginning - Copyrights at the end

=$49,800 - $45,800 = $4,000

3) Total Depreciation and Amortization Expense = $24,540 + $4,000 = $28,540

4) Equipment A/c

b/d	129,900	Sales A/c	8,060
Gain on sale of Equipment A/c	2,000	Accumulated Depreciation A/c	14,140
Cash (Purchase) (bal. fig)	45,500
		c/d	155,200