Ron Nord and Lisa Smith are examining the following statement of cash flows for Carpino Company for the year ended January 31, 2007.

CARPINO COMPANY 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

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642 CHAPTER 12 Statement of Cash Flows 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.

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, Ron or Lisa? Explain your position.

COMMUNICATION ACTIVITY