Vincent Fairfield, CEO of MetroAir, sat at his desk, examining the company's latest financial statements. "This just doesn't make sense to me," Vincent thought. "We're reporting $1,662,015 in net income, yet our Cash balance decreased by over $350,000. With these results, I would think the Cash balance should go up by at least $1,000,000."

Required
a. Prepare MetroAir's statement of cash flows using either the indirect or the direct method, as specified by your professor. During the year, the company purchased equipment, issued short-term debt, and retired long-term debt.
b. Prepare a memo to Vincent explaining why he should not necessarily expect an increase in cash when the company reports net income. Be specific and include any issues that should cause Vincentconcern.

Transcribed Image Text:

MetroAir Income Statement For the Year Ended December 31, 2013 Sales Cost of goods sold Gross proft Selling expense Administrative expense Salaries expense Depreciation expense Interest expense Income before taxes lax expense Net income $78,555,000 58,146,480 20,408,520 5,168,505 3,814,660 7,408,490 1,016,835 625,725 2,374,305 712,290 1,662,015 MetroAir Balance Sheets As of December 31 2013 2012 Cash Accounts receivable, net Inventories Other assets $ 266,280 9,355,695 9,605,580 691,380 19,918,935 8,142,870 $28,061,805 $ 631,710 8,751,435 8,206,635 359,640 17,949,420 9,009,705 $26,959,125 Total current assets Machinery and equipment, net Total assets Accounts payable Accrued expenses Salaries payable Interest payable Income taxes payable Short-term debt Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 6,624,030 563,371 615,940 58,143 63,781 2,175,000 10,100,265 4,200,000 14,300,265 3,150,000 10,611,540 13,761,540 $6,675,210 1,023,738 595,380 55,412 59,860 1,950,000 10,359,600 4,500,000 14,859,600 3,150,000 8,949,525 12,099,525 $26,959,125 $28,061.805