Tom Epps and Mary Jones are examining the following statement of cash flows for Guthrie Company for

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Question:

Tom Epps and Mary Jones are examining the following statement of cash flows for Guthrie Company for the year ended January 31, 2019.

GUTHRIE COMPANY

Statement of Cash Flows

For the Year Ended January 31, 2019

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.

(a) Using the data provided, prepare a statement of cash fl ows 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.

(b) With whom do you agree, Tom or Mary? Explain your position.