Question

In: Accounting

You are the CFO for Tom & Jerry’s, Inc. Together with Tom Fheelein and Jerry Rhodeint,...

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 & JERRYS’S, INC.

Statement of Cash Flows

For the Year Ended January 31, 2015

Sources of cash

From sales of merchandise

$380,000

From sale of capital stock

410,000

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

951,000

Uses of cash

For purchase of fixtures and equipment

320,000

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

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 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.

Solutions

Expert Solution

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.


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