Tom Epps and Mary Jones are examining the following statement of cash flows for Guthrie Company for the year ended January 31, 2017.

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.

Instructions

With the class divided into groups, answer the following.

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

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GUTHRIE COMPANY Statement of Cash Flows For the Year Ended January 31, 2017 Sources of cash From sales of merchandise $380,000 420,000 From sale of capital stock From sale of investment (purchased below) From depreciation From issuance of note for truck 80,000 55,000 20,000 6,000 From interest on investments Total sources of cash 961,000 Uses of cash For purchase of fixtures and equipment For merchandise purchased for resale For operating expenses (including depreciation) For purchase of investment For purchase of truck by issuance of note For purchase of treasury stock For interest on note payable 330,000 258,000 160,000 75,000 20,000 10,000 3,000 Total uses of cash 856,000 Net increase in cash $105,000