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: 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. With whom do you agree, Tom or Jerry? Explain your position.

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter16: Statement Of Cash Flows

Section: Chapter Questions

Problem 15E

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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:

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.
With whom do you agree, Tom or Jerry? Explain your position.

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