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?