Question

Jerry Mak, a certified public accountant, has just given his employer Kevin Roll, the president of Roll Print Gallery, Inc., the following income statement.
Roll Print Gallery, Inc.
Income Statement
For the Year Ended December 31, 2011
Sales ................. $884,000
Cost of goods sold ............ 508,000
Gross margin ............... $376,000
Operating expenses (including depreciation
expense of $20,000) ........... 204,000
Operating income ............ $172,000
Interest expense .............. 24,000
Income before income taxes ....... $148,000
Income taxes expense ........... 28,000
Net income ............... $120,000
After examining the statement, Roll said to Mak, “Jerry, the statement seems to be well done, but what I need to know is why I don’t have enough cash to pay my bills this month. You show that I earned $120,000 in 2011, but I have only $24,000 in the bank. I know I bought a building on a mortgage and paid a cash dividend of $48,000, but what else is going on?” Mak replied, “To answer your question, we have to look at comparative balance sheets and prepare another type of statement. Take a look at these balance sheets.” The statement handed to Roll follows.


1. To what other statement is Mak referring? From the information given, prepare the additional statement using the indirect method.
2. Roll Print Gallery has a cash problem despite profitable operations. Explainwhy.


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  • CreatedSeptember 10, 2014
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