Question
You have been asked to settle an argument between a client and his inexperienced bookkeeper. Presented below is a Statement of Cash Flows prepared by
You have been asked to settle an argument between a client and his inexperienced bookkeeper. Presented below is a Statement of Cash Flows prepared by the bookkeeper.
Beautiful Apparel
Statement of Cash Flows
January 31, 2022
Sources of cash
From sales of merchandise $382,000
From sale of common stock 380,000
From sale of investment 120,000
From depreciation 80,000
From issuance of note for truck 30,000
From interest on investments 8,000
Total Sources of cash 1,000,000
Uses of cash
For purchase of fixtures and equipment 330,000
For merchandise purchased for resale 253,000
For operating expenses (including depreciation) 170,000
For purchase of investment 95,000
For purchase of truck by issuance of note 30,000
For purchase of treasury stock 10,000
For interest on note 3,000
Total uses of cash 891,000
Net increase in cash $109,000
The bookkeeper claims this statement is an excellent portrayal of a great first year with an increase in cash of $109,000. Your client claims that the first year of operations was an operating failure and the $109,000 is not the increase in cash. Using the statement above, prepare a statement of cash flows in proper form using the indirect method. The only noncash items in income are depreciation and the gain from the sale of the investment (the purchase and the sale are related). With whom do you agree, your client or the bookkeeper? Explain your position.
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