In: Accounting
You are the CFO for Tom & Jerry's, Inc. Together with Tom Freeman and Jerry Freeloader, the company's two shareholders, you are examining the following statement of cash flows which they prepared for the Tom & Jerry's, Inc. for the year ended January 31, 2019.
Tom & Jerry's, Inc.
Statement of Cash Flows
For the Year Ended January 31, 2019
Sources of cash
From
sales of merchandise $380,000
sale of capital stock 410,000
sale of investment (purchased below) 80,000
depreciation 55,000
issuance of note for truck 20,000
interest on investments 6,000
Total from sources of cash $951,000
Uses of cash
For
purchase of fixtures and equipment 320,000
merchandise purchased for resale 258,000
operating expenses (including depreciation) 160,000
purchase of investment 75,000
purchase of truck by issuance of note 20,000
purchase of treasury stock 10,000
interest on note payable 3,000
Total cash used 846,000
Net increase in cash $105,000
Tom claims that this statement of cash flows is an excellent portrayal of a superb first year with cash increasing $105,000. Jerry disagrees and indicates that it was NOT a superb first year, it was an operating failure and the cash flow statement is wrong because $105,000 is not the actual increase in cash. The cash balance at the beginning of the year was $140,000.
Instructions
(a) Using the data provided, prepare a statement of cash flows using the indirect method. The only non-cash item in the income statement is depreciation. The purchase/sale of the investment and any resulting gain/loss are investing (not operating) activities. Hint: You may need to figure out net income for the year.
(b) With whom do you agree, Tom or Jerry? Explain your position
Solution to part (a)
Tom & Jerry's, Inc.
Statement of Cash Flows
For the Year Ended January 31, 2019
Particulars | Amt ($) | Amt ($) |
Cash Flow from operating activities | ||
Net Income / (Loss) | (35,000) | |
Add: Depreciation | 55,000 | |
Cash flow from operation activities (A) | 20,000 | |
Cash flow from Investing activities | ||
purchase of fixtures and equipment | (320,000) | |
purchase of investment | (75,000) | |
sale of investment (purchased above) | 80,000 | |
Cash used in Investing Activities (B) | (315,000) | |
Cash Flow from Financing Activities | ||
sale of capital stock | 410,000 | |
purchase of treasury stock |
(10,000) | |
Cash generated from Financing Activities (C) | 400,000 | |
Cash Increase in the current year (A+B+C) | 105,000 |
Notes:
1) Issuance of note for truck and purchase of truck by issuance of note are non cash items therefor not adjusted in cash flow of funds.
2)Calculation of net income:
Sales of merchandise | $ 380,000 |
Interest on Investments | $ 6,000 |
(A) | $ 386,000 |
less: Expenses | |
Purchase of merchandise | $ 258,000 |
Operating expenses (including depreciaiton) | $ 160,000 |
Interest on note payable | $ 3,000 |
(B) | $ 421,000 |
Net Income (A-B) | (35,000) |
Solution to part (2)
Tom is correct in his assesment of cash flow during the year. Increase in cash is $ 105,000 as explained in part (a) Company suffered a net loss of $ 35,000 but majority of this loss was due to the depreciation charge of $ 55,000.Major cash inflow was from the issue of capital stock while, the outflows were in the form of invesmtents in fixtures and equipment.