You are the CFO for Tom & Jerry's, Inc. Together with Tom Freeman and Jerry Freeloader, the company's two shareholders, you are examining the following statement of cash flows which they prepared for the Tom & Jerry's, Inc. for the year ended January 31, 2019.

Tom & Jerry's, Inc.

Statement of Cash Flows

For the Year Ended January 31, 2019

Sources of cash

From

sales of merchandise $380,000

sale of capital stock 410,000

sale of investment (purchased below) 80,000

depreciation 55,000

issuance of note for truck 20,000

interest on investments 6,000

Total from sources of cash $951,000

Uses of cash

For

purchase of fixtures and equipment 320,000

merchandise purchased for resale 258,000

operating expenses (including depreciation) 160,000

purchase of investment 75,000

purchase of truck by issuance of note 20,000

purchase of treasury stock 10,000

interest on note payable 3,000

Total cash used 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 disagrees and indicates that it was NOT a superb first year, it was an operating failure and the cash flow statement is wrong because $105,000 is not the actual increase in cash. The cash balance at the beginning of the year was $140,000.

Instructions

(a) Using the data provided, prepare a statement of cash flows using the indirect method. The only non-cash 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.

(b) With whom do you agree, Tom or Jerry? Explain your position