Question

Case Question 13-30

Vincent Fairfield, CEO of MetroAir, sat at his desk, examining the company’s latest financial statements. “This just doesn’t make sense to me,” Vincent thought. “We’re reporting $1,662,015 in net income, yet our Cash balance decreased by over $350,000. With these results, I would think the Cash balance should go up by at least $1,000,000.”

MetroAir Income Statement For the Year Ended December 31, 2016
Sales		$78,555,000
Cost of goods sold		58,146,480
Gross profit		20,408,520
Selling expense		5,168,505
Administrative expense		3,814,660
Salaries expense		7,408,490
Depreciation expense		1,016,835
Interest expense		625,725
Income before taxes		2,374,305
Tax expense		712,290
Net income		$1,662,015

MetroAir Balance Sheets As of December 31
		2016		2015
Cash		$266,280		$631,710
Accounts receivable, net		9,355,695		8,751,435
Inventories		9,605,580		8,206,635
Other assets		691,380		359,640
Total current assets		19,918,935		17,949,420
Machinery and equipment, net		8,142,870		9,009,705
Total assets		$28,061,805		$26,959,125
Accounts payable		$6,624,030		$6,675,210
Accrued expenses		563,371		1,023,738
Salaries payable		615,940		595,380
Interest payable		58,143		55,412
Income taxes payable		63,781		59,860
Short-term debt		2,175,000		1,950,000
Total current liabilities		10,100,265		10,359,600
Long-term debt		4,200,000		4,500,000
Total liabilities		14,300,265		14,859,600
Common stock		3,150,000		3,150,000
Retained earnings		10,611,540		8,949,525
Total stockholders’ equity		13,761,540		12,099,525
Total liabilities and stockholders’ equity		$28,061,805		$26,959,125

During the year, the company purchased equipment, issued short-term debt, and retired long-term debt.

(a1)

Prepare MetroAir’s statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign, e.g. -15,000 or in parentheses, e.g. (15,000).)

Answer 1

MetroAir
Statement of cash flows
As of December 31
Cash flows from operating activities
Net income	$1,662,015
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expense	$1,016,835
Increase in accounts receivable	-$604,260	(8751435-9355695)
Increase in inventory	-$1,398,945	(8206635-9605580)
Increase in other assets	-$331,740	359640-691380
Decrease in accounts payable	-$51,180	(6624030-6675210)
Decrease in accrued expenses	-$460,367	(563371-1023738)
Increase in salaries payable	$20,560	615940-595380
Increase in interest payable	$2,731	58143-55412
Increase in income taxes payable	$3,921	63781-59860
Net cash provided by operating activities	-$140,430
Cash flows from investing activities
Purchase of machinery and equipment	-$150,000	(8142870+1016835-9009705)
Net cash used by investing activities	-$150,000
Cash flows from financing activities
Cash from borrowing of short term debt	$225,000	2175000-1950000
Repayment of long term debt	-$300,000	4200000-4500000
Net cash provided by financing activities	-$75,000
Net increase in cash	-$365,430
Cash balance, December 31, prior year	$631,710
Cash balance, December 31, current year	$266,280