BYP12-6 Ron Nord and Lisa Smith are examining the following statement of cash flows for Carpino Company for the year ended January 31, 2007.
Statement of Cash Flows
For the Year Ended January 31, 2007
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
Ron claims that Carpino's statement of cash flows is an excellent portrayal of a superb first year with cash increasing $105,000. Lisa 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.
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, Ron or Lisa? Explain your position.
The solution explains how to prepare a statement of cash flows in proper form.