Sol Stein, certified public accountant, has just given his employer Sing Moy, the president of Moy Print Gallery, Inc., the income statement that appears below the page.

After examining the statement, Moy said to Stein, "Sol, the statement seems to be well done, but what I need is why I don't have enough cash to pay my bills this month. You show that I earned $120,000 in 2010, 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?"

Stein replied, "To answer your question, we have to look at these balance sheets," The statement handed to Moy follows.

Moy Soy Gallery, Inc. Income statement for the year ended December 31, 2010

Sales.....................................................................$884,000

Cost of goods sold......................................................508,000

Gross margin............................................................$376,000

Operating expenses (including depreciation........................204,000

Expenses of $20,000

Operating income.....................................................$172,000

Interest expense..........................................................24,000

Income before income taxes.........................................$148,000

Income taxes expense...................................................28,000

Net income............................................................$120,000

Moy Print Gallery, Inc. Comparative Balance Sheets December 31, 2010 &2009

1. To what other statement is Stein referring? From the information given, prepare the additional statement using the indirect method.

2. Moy Print Gallery, Inc., has a cash problem despite profitable operations. Why is this the case?

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2010 2009 Assets $24,000 Cash $40,000 178,000 146,000 Account receivable (net) 240,000 Inventory 180,000 Prepaid expenses 10,000 14,000 Building 400,000 Accumulated depreciation (20,000) Total assets $832,000 $380,000 2010 2009 Liabilities and Stockholders' equity Account payable $74,000 S96,000 Income taxes payable 60,000 40,000 Mortgage payable 400,000 Common stock 200,000 200,000 Retained eamings 152,000 80,000 Total liabilities and stocks' equity S832,000 S380,000