Question

CT13.4 Tom Epps and Mary Jones are examining the following statement of cash flows for Guthrie Company for the year ended January 31, 2020.

Guthrie Company Statement of Cash Flows For the Year Ended January 31, 2020
Sources of cash
From sales of merchandise	$380,000
From sale of capital stock	420,000
From sale of investment (purchased below)	80,000
From depreciation	55,000
From issuance of note for truck	20,000
From interest on investments	6,000
Total sources of cash	961,000
Uses of cash
For purchase of fixtures and equipment	330,000
For merchandise purchased for resale	258,000
For operating expenses (including depreciation)	160,000
For purchase of investment	75,000
For purchase of truck by issuance of note	20,000
For purchase of treasury stock	10,000
For interest on note payable	3,000
Total uses of cash	856,000
Net increase in cash	$105,000

Tom claims that Guthrie’s statement of cash flows is an excellent portrayal of a superb first year with cash increasing $105,000. Mary replies that it was not a superb first year. Rather, she says, the year was an operating failure, that the statement is presented incorrectly, and that $105,000 is not the actual increase in cash. The cash balance at the beginning of the year was $140,000. Assume that all merchandise purchased has been sold.

Instructions

With the class divided into groups, answer the following.

1. a. Using the data provided, prepare a statement of cash flows in proper form using the indirect method. The only noncash items in the income statement are depreciation and the gain from the sale of the investment. (please explain how you get each value)
2. b. With whom do you agree, Tom or Mary? Explain your position.

Answer 1