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:

1. 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.

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

Answer 1

Tom and Jerry's Inc.
Statement of Cash Flows as of 31 January 2015 = using Indirect Method.
				(All values in $)
Cash Flows from Operating Activities
Net Income (Sales - COGS - Depreciation)						220000
Add: Depreciation					22000
Less: Interest on Investments					-6000	16000
Decrease in Inventories						152000
Net Cash Inflows from Operating Activities						388000
Cash Flows from Investing Activities
Purchase of Fixed Assets					-320000
Purchase of Investments					-75000
Purchase of Treasury Stock					-10000
						-405000
	Cash Flows from Financing Activities
	Net Notes issued less paid.				0
	Interest on Note				-3000
						-3000
	Net Decrease in Cash and Cash Equivalents					-20000
	Cash Balance at the beginning of the year					140000
	Cash Balance at the end of the year					120000
	From the cash flow statement drawn, it can be inferred that.
	Jerry has made an accurate assessment of the financial position of the Company.