You are the CFO for Tom & Jerry’s, Inc. Together with Tom Fheelein and Jerry Rho
ID: 2486544 • Letter: Y
Question
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.
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
Explanation / Answer
Answer: A
Since the statement of cash flow is to be prepared using the indirect method. Accordingly, first we need to calculate the net income/loss.
Calculation of net income/loss:
CASH FLOW STATEMENT
Answer: B
Jerry.
The $105000 was total cash flows, not just from operating activities. There was a net loss of $30000, with only $20000 of the cash flow coming from operating activities.The majority of the cash flow was generated from the issuance of the common stock.
Revenue: From sale of merchandise 380000 From gain on sale of investment(80000 sale - 75000 purchase) 5000 From interest on investments 6000 Total revenues 391000 Expenses: For merchandise purchased for resale 258000 For operating expenses ( including dep.) 160000 For interest on note payable 3000 Total expenses 421000 Net income/loss (Total revenue - Total expenses) -30000Related Questions
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