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NORTH MOUNTAIN NURSERY, INC.:
STATEMENT OF CASH FLOW

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John Powers felt the warm April breeze on his face as he traveled south on Highway 29
after finishing his interview at North Mountain Nursery, Inc. It was his second interview with
Tim Dunton, the owner of North Mountain Nursery, for the position of chief financial officer.

Driving down the highway, Powers reflected on his conversation with Dunton as the

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interview came to a close. Dunton had said, “John, you have some skills we could really use. We
have been growing quite a bit over the last couple of years, and we need more sophistication in
the finance and accounting area. We are getting too big just to employ a bookkeeper. We need
someone who can help us think intelligently about the financial future of the business. Let me
pencil out an offer and get back with you in the next couple of days.” Encouraged by Dunton’s
comments, Powers had responded, “This sounds great, Tim. I wonder if I might get a copy of the
company’s financial statements to take with me. I would like to look them over. You know—just
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to see what things look like.” Dunton had disappeared down the hall into the bookkeeper’s office
and then returned with several pages for Powers to take with him. “Here’s a complete set of the
financial statements for our 2006 year.”

Powers was inspired by the conversation and excited about the position’s potential. After
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working in several large organizations, he had developed an interest in smaller businesses. And
he had a keen interest in the outdoors, landscaping, and watching things grow each year as the
seasons changed. Powers understood the opportunity that the area’s booming residential
construction presented for a company like North Mountain Nursery, and he was sure he could
help the company make the most of it. He just hoped that the company’s financial condition
could support having him on staff, so he planned to dig into its financial statements to see how
things looked after he got home later that day.
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The Financial Statements

Late that afternoon, Powers went into his study and spread the financial statements out on
his desk: North Mountain Nursery’s income statement for the year ended December 31, 2006
(Exhibit 1) and the company’s balance sheet as of December 31, 2006 (Exhibit 2).
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This case was prepared by Luann J. Lynch, Associate Professor of Business Administration. It was written as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright
© 2007 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order
copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced,
stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic,
mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

This document is authorized for educator review use only by Pablo Arana, HE OTHER until February 2018. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860
 -2- UV0806

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“Interesting,” said Powers to the empty room. “An income statement and a balance sheet but no
statement of cash flow. But Dunton said this was a complete set of financial statements for 2006.
I suppose I will have to create a statement of cash flow myself.”

Powers recalled that Dunton had talked about having purchased some new equipment

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during the past year to support the growing business, and he had beamed when he talked about
the deal he had struck—$75,000 for some equipment that was only three years old and that had
had very little use—a deal too good to pass up. At the same time, Dunton had also mentioned
that he had sold some equipment that was no longer used for its book value of $25,000. Finally,
he had indicated that the company had paid dividends of $20,000 to the owners in 2006. Keeping
those figures in mind, Powers began to create a statement of cash flow for North Mountain
Nursery.

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No
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or 617.783.7860
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Exhibit 1
NORTH MOUNTAIN NURSERY, INC.:
STATEMENT OF CASH FLOW
Income Statement for the Year Ended December 31, 2006

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Revenues $2,181,250
Cost of merchandise sold 1,110,600
Gross margin 1,070,650

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Operating expenses:
Rent expense 120,600
Utilities expense 60,350
Phone expense 6,100
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Salary and wage expense 650,000
Depreciation expense 20,000
Marketing expense 41,000
Total operating expense 898,050
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Operating income 172,600

Interest expense 9,000
Income before taxes 163,600
Income-tax expense 57,300
No

Net income $ 106,300

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or 617.783.7860
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Exhibit 2
NORTH MOUNTAIN NURSERY, INC.:
STATEMENT OF CASH FLOW
Balance Sheet for the Years Ended December 31, 2005, and December 31, 2006

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December 31, 2005 December 31, 2006

Current assets:

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Cash $ 47,950 $ 45,600
Accounts receivable 655,000 700,000
Inventory 234,700 250,000
Total current assets 937,650 995,600
Equipment 160,000 190,000
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Total assets $1,097,650 $1,185,600
Current liabilities:
Accounts payable 510,000 530,000
Utilities payable 19,000 18,250
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Salary and wages payable 9,750 10,000

Income tax payable 7,100 7,250
Total current liabilities 545,850 565,500
Noncurrent liabilities:
Loan payable 172,000 154,000
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Total liabilities 717,850 719,500

Owners’ equity:
Capital stock 240,000 240,000
Retained earnings 139,800 226,100
Total liabilities and owners’ equity $1,097,650 $1,185,600
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This document is authorized for educator review use only by Pablo Arana, HE OTHER until February 2018. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860