Solution to QS12-17-7th Edition(1)

Solution to QS12-17-7th Edition(1) - 10,000 Net cash used...

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Quick Study 12-17 (25 minutes) Part 1 MONTGOMERY, INC. Statement of Cash Flows (Indirect Method) For Year Ended December 31, 2014 Cash flows from operating activities Net income .................................................................................... $ 10,500 Adjustments to reconcile net income to net cash provided by operating activities Decrease in accounts receivable ................................................ 2,100 Increase in inventory .................................................................... (19,950) Decrease in accounts payable .................................................... (1,500) Decrease in salaries payable ....................................................... (100) Depreciation expense .................................................................. 7,200 Net cash used in operating activities ......................................... $ (1,750) Cash flows from investing activities Cash paid for equipment (Note 1) ............................................... (8,400 ) Net cash used in investing activities .......................................... (8,400) Cash flows from financing activities Cash received from stock issuance
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Unformatted text preview: .......................................... 10,000 Net cash used in financing activities. ......................................... 10,000 Net decrease in cash. ...................................................................... $ (150) Cash balance at beginning of year. ............................................... 30,550 Cash balance at end of year. .......................................................... $ 30,400 Note 1 Equipment Bal., 12/31/2013 41,500 Purchase “plug” Sale plug = $8,400 Bal., 12/31/2014 49,900 Quick Study 12-17 (Concluded) Part 2 The company’s operating cash flows are negative, $(1,750). This is not a good omen. However, much of this is attributed to a huge increase in inventory. Thus, an assessment of the saleable nature of that inventory, and why it is being built up, is crucially important. Also, the level of cash has only marginally declined, from $30,550 to $30,400. Thus, there seems to be sufficient cash. However, one should question why so much of its assets is in the form of cash (more than 19%) as this is not a productive use of assets....
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