Vincent Fairfield, CEO of MetroAir, sat at his desk, examiningthe company's latest financial statements. “This just doesn't makesense to me,” Vincent thought. “We're reporting $1,662,015 in netincome, yet our Cash balance decreased by over $350,000. With theseresults, 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 |
Required
(a)
Prepare MetroAir's statement of cash flows using either theindirect or the direct method, as specified by your professor.During the year, the company purchased equipment, issued short-termdebt, and retired long-term debt.
(b)
Prepare a memo to Vincent explaining why he should notnecessarily expect an increase in cash when the company reports netincome. Be specific and include any issues that should causeVincent concern.
