Pete Kent and Maria Robles are examining the following statement of cash flows for Sullivan Company for the year ended January 31, 2022.

Sullivan Company

Statement of Cash Flows

For the Year Ended January 31, 2022

Sources of cash

From sales of merchandise $385,000 From sale of capital stock 405,000 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) 170,000 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 $95,000

Pete claims that Sullivans statement of cash flows is an excellent portrayal of a superb first year, with cash increasing $95,000. Maria replies that it was not a superb first year. Rather, she says, the year was an operating failure, the statement is presented incorrectly, and $95,000 is not the actual increase in cash. The cash balance at the beginning of the year was $140,000.

Instructions

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, Pete or Maria? Explain your position.