Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations.

PACIFIC CLOTHING STORE

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 31, 2010

Sources of cash

From sales of merchandise..................................................... € 382,000

From sale of ordinary shares.....................................................380,000

From sale of debt 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 shares...................................................10,000

For interest on note.......................................................................3,000

Total uses of cash.....................................................................891,000

Net increase in cash.............................................................. € 109,000

Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing €109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and €109,000 is not the actual increase in cash.

Instructions

(a) With whom do you agree, Teresa or Lenny? Explain your position.

(b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only non-cash items in income are depreciation and the gain from the sale of the investment (purchase and sale are related).