Question

Use the following financial statements and additional information to

1. prepare a statement of cash flows for the year ended December 31, 2018, using the indirect method, and
2. analyze and briefly discuss the statement prepared in part 1 with special attention to operating activities and to the company’s cash level

MONTGOMERY INC. Comparative Balance Sheets December 31, 2018, and 2017
	2018	2017
Assets
Cash	\( 30,400	\) 30,550
Accounts receivable, net	10,050	12,150
Inventory	90,100	70,150
Total current assets	130,550	112,850
Equipment	49,900	41,500
Accum. depreciation—Equipment	(22,500)	(15,300)
Total assets	\(157,950	\)139,050
Liabilities and Equity
Accounts payable	23,900	\( 25,400
Salaries payable	500	600
Total current liabilities	24,400	26,000
Equity
Common stock, no par value	110,000	100,000
Retained earnings	23,550	13,050
Total liabilities and equity	\)157,950	\(139,050

MONTGOMERY INC. Income Statement For Year Ended December 31, 2018
Sales	\)45,575
Cost of goods sold	(18,950)
Gross profit	26,625
Operating expenses
Depreciation expense \(7,200
Other expenses 5,550
Total operating expense	12,750
Income before taxes	13,875
Income tax expense	3,375
Net income	\)10,500

Additional Information

a. No dividends are declared or paid in 2018.

b. Issued additional stock for $10,000 cash in 2018.

c. Purchased equipment for cash in 2018; no equipment was sold in 2018.

Short answer

1. Net decrease in cash equals $150.
2. The company's operating cash flows is negative, $(1,750). This is not a good omen.

Step-by-step solution

(1) Preparing Statement of Cash flow

MONTGOMERY INC. Statement of Cash flows (Indirect Method) For the year Ended December 2018
Cash flow from operating activities
Net Income	$10,500
Adjustment to reconcile net income to net cash provided by operating activities
Income item not affecting the cash
Depreciation expense	7,200
Changes in current operating assets and liabilities
Decrease in account receivables ($12,150-$10,050)	2,100
Increase in inventory ($90,100-$70,150)	(19,950)
Decrease in accounts payable ($25,400-$23,900)	(1,500)
V Decrease in salaries payable ($600-$500)	(100)
Net cash used in operating activities		($1,750)
Cash Flow from investing activities
Cash paid for equipment	($8,400)
Net cash used in investing activities		($8,400)
Cash flow from Financing activities
Cash received from stock issuance	(10,000)
Net cash used in financing activities		($10,000)
Net decrease in cash		($150)
Cash balance at the beginning of the year		30,550
Cash balance at the end of the year		$30,400
Net decrease in cash		($150)

Working note:

Dr.	Equipment		Cr.
Balance 12/31/2017	41,500
Purchase	$8,400	Sale	0
Balance 12/31/2018	49,900

(2) Analysing and discussing the cash flow statement.

Operating cash flows for the business are negative ($ (1,750). This is not a promising sign. But a significant portion of this is related to a sharp rise in inventory. Therefore, it is important to evaluate whether or not that inventory is sellable and the reasons behind its accumulation.

Additionally, the amount of money has only slightly decreased, from $30,550 to $30,400. Therefore, it appears that there is enough money. However, considering this is not a constructive use of assets, one should wonder why so much of its assets (more than 19 percent) are in the form of cash.