Question

QS 12-19 Indirect: Preparing statement of cash flows LO P1, P2, P3

MONTGOMERY INC. Comparative Balance Sheets December 31, 2018 and 2017
		2018				2017
Assets
Cash	$	31,000			$	31,200
Accounts receivable, net		10,300				12,600
Inventory		92,400				72,800
Total current assets		133,700				116,600
Equipment		51,200				43,100
Accum. depreciation—Equipment		(23,100	)			(16,000	)
Total assets	$	161,800			$	143,700
Liabilities and Equity
Accounts payable	$	24,600			$	26,600
Salaries payable		500				600
Total current liabilities		25,100				27,200
Equity
Common stock, no par value		112,800				103,400
Retained earnings		23,900				13,100
Total liabilities and equity	$	161,800			$	143,700

MONTGOMERY INC. Income Statement For Year Ended December 31, 2018
Sales				$	45,900
Cost of goods sold					(19,100	)
Gross profit					26,800
Operating expenses
Depreciation expense	$	7,100
Other expenses		5,500
Total operating expense					12,600
Income before taxes					14,200
Income tax expense					3,400
Net income				$	10,800

Additional Information

1. No dividends are declared or paid in 2018.
2. Issued additional stock for $9,400 cash in 2018.
3. Purchased equipment for cash in 2018; no equipment was sold in 2018.

1. Use the above financial statements and additional information to prepare a statement of cash flows for the year ended December 31, 2018, using the indirect method. (Amounts to be deducted should be indicated by a minus sign.)
  

Answer 1

Solution

MONTGOMERY INC.
Cash Flow Statement
For year ended 31st December 2018
A. Cash Flows from Operating Activity
Net Income		$      10,800.00
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$          7,100.00
Changes in current operating assets and liabilities:
Decrease in Accounts receivables	$          2,300.00
Increase in Inventory	$     (19,600.00)
Decrease in salaries payable	$           (100.00)
Decrease in Accounts payable	$       (2,000.00)
		$    (12,300.00)
Net cash flow from Operating activities		$      (1,500.00)
B. Cash flows from Investing Activities
Purchase of Equipment	$       (8,100.00)
Net cash flow used for investing activities		$      (8,100.00)
C. Cash Flows from Financing activities
Issue of Common stock	$          9,400.00
Cash flows from Financing activities		$         9,400.00
Net Increase (Decrease) in Cash [A+B+C]		$          (200.00)
Cash at the beginning		$      31,200.00
Cash at the end		$      31,000.00

.General notes for cash flow
Cash is increased when Current liability increase or Current asset Decrease.
Cash is Decreased when Current liability Decrease or Current asset Increase.
Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash
Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.