Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations.

                                              Pacific Clothing Store
                                            Statement of Cash Flows
                                 For the Year Ended January 31, 2020
Sources of cash
From sales of merchandise........................................................$ 382,000
From sale of common stock..........................................................380,000
From sale of investment................................................................120,000
From depreciation............................................................................80,000
From issuance of note for truck......................................................30,000
From interest on investments...........................................................8,000
Total sources of cash...................................................................1,000,000
Uses of cash
For purchase of fixtures and equipment.....................................330,000
For merchandise purchased for resale........................................253,000
For operating expenses (including depreciation).......................170,000
For purchase of investment.............................................................95,000
For purchase of truck by issuance of note.....................................30,000
For purchase of treasury stock........................................................10,000
For interest on note.............................................................................3,000
Total uses of cash.............................................................................891,000
Net increase in cash.....................................................................$ 109,000

Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing $109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and $109,000 is not the actual increase in cash.

Instructions

a. With whom do you agree, Teresa or Lenny? Explain your position.

b. Using the data provided, prepare a statement of cash flows in proper indirect method form. The only noncash items in income are depreciation and the gain from the sale of the investment (purchase and sale are related).