In: Accounting
You are the CFO for Tom & Jerry’s, Inc. Together with Tom Fheelein and Jerry Rhodeint, the company’s two shareholders, you are examining the following statement of cash flows which they prepared for Tom & Jerry’s, Inc. for the year ended January 31, 2015.
|
Tom claims that this statement of cash flows is an excellent
portrayal of a superb first year with cash increasing $105,000.
Jerry replies that it was not a superb first year. Rather, he says,
the year was an operating failure as the statement is presented
incorrectly and $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 noncash 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.
a)
Income Statement | |
Sale of merchandise | 380,000.00 |
Less: purchases | 258,000.00 |
Less: Operating Expenses | 160,000.00 |
Operational Income | - 38,000.00 |
Add: Interest on Investment | 6,000.00 |
Less: Interest on Notes Payable | 3,000.00 |
Add: Gain on Investment | 5,000.00 |
Net Income | - 30,000.00 |
Cash Flow | ||
Cashflow from Operating Activities | ||
Net Income | - 30,000.00 | |
Add: Depreciation | 55,000.00 | |
Less: Gain from Investment | 5,000.00 | |
Cash from Operating Activites | 20,000.00 | |
Cash From Investing Activities | ||
Purchase of Fixtures and Equipment | - 320,000.00 | |
Purchase of Investment | - 75,000.00 | |
Proceeds from Sale of Investment | 80,000.00 | |
Cash From Investing Activities | - 315,000.00 | |
Cash From Financing Activities | ||
Proceeds from Capital Stock | 410,000.00 | |
Purchase of Treasury Stock | - 10,000.00 | |
Cash From Financing Activities | 400,000.00 | |
Net Cash from Activities | 105,000.00 | |
Cash Balance at Beginning | 140,000.00 | |
Cash Balance at Ending | 245,000.00 |
b) The Net Cash has increased bby $105,000. However, it is not entrirely due to operating activities.
The business has suffered an opearting loss of $38,000 and there is a Net Loss of $30,000.
The cash inflow from operating activities is only $20,000.
The rest of $85,000 have come from Investing anf Financing Activities. In that too its is mainly Financing activities in form of capital raised.
While Tom is correct in saying Cash has increased by $105,000, Jerry is also correct in saying the year has been a failure from operaying point of view.