evaluate TTFs Cash Flow relative to the building transactions and disclosures showing the correct reporting on the FYE financial statements.

Tried and True Furniture (TTF) recently hired your accounting firm, Peters, James, & Johns, LLC, to audit the financial statements of TTF. The company has a fiscal year-end (FYE) of October 31, and is located at: 2050 W Bethel Ave, Muncie, IN 47304. TTF is a private company that manufactures handmade furniture for both personal and business use. The company is required to prepare financial statements using GAAP in order to meet loan covenants with the financing organization. The company currently has $12,000,000 of buildings and $10,000,000 of loans related to those buildings reported on the balance sheet. The buildings were financed directly with the seller of the buildings and the loans will be paid off over the next 10 years. These loans are for new buildings that were purchased during the year for use in the business. The prior facilities were sold during the year and recorded as noted below. TTF expects to have the new buildings for the next 20 years. TTF has additional financial information noted below.

The President of the company is Sam Sung. You are tasked with reviewing the information and writing a letter to Sam regarding TTFs Cash Flow reporting and the accuracy of what they have reported.

You recently were in a meeting with Sam reviewing the tax returns and financial statements of TTF. You noted that the buildings and corresponding loan are recorded on the books of the company. However, you noted that TTF had paid for $2,000,000 of the buildings value at time of purchase and had financed the remaining amount directly with the seller with the $10,000,000 mortgage. While reviewing the Statement of Cash Flows you see that TTF recorded net proceeds from the sale and purchase of buildings of $3,000,000 as a reduction in the operating section, a $4,500,000 increase in the investing section for net additions to buildings, with a corresponding $10,000,000 outflow for the mortgage in the financing section. Additionally, there is $4,500,000 reported in investing for the Gain and an adjustment in the operating for the reduction of accumulated depreciation. The journal entries that were made at the time of purchase and sale of the buildings are:

Buildings $12,000,000 Cash $ 2,000,000 Mortgage Payable $10,000,000 Cash $ 5,000,000 Accumulated Depreciation $ 7,000,000 Buildings $ 7,500,000 Gain on Disposal - Bldgs $ 4,500,000 As Reported in the Cash Flow Statement (Note: this isn't a complete Cash Flow. Only what relates to the building transactions) Operating Activities: Net Proceeds from Building transactions ($ 3,000,000) Reduction in Accumulated Depreciation $ 7,000,000 Investing Activities: Gain on Disposal of Buildings Net Addition to Buildings $ 4,500,000 $ 4,500,000 Financing Activities: Additional Mortgage Payable ($10,000,000) Net Cash Flow from Building transactions $ 3,000,000