Assignment -
Read the scenario presented in Broaden Your Perspective (BYP) 12-6 on p. 641 in Ch. 12 of Financial Accounting.
Prepare the statement of cash flows using the indirect method. The only noncash items are depreciation and the gain on sale from investments.
Write a memo to shareholders explaining whether the organization had a performing or underperforming first year.
Discuss the reasons for your conclusion, referencing actual numbers from the statement of cash flows you developed.
Ron Nord and Lisa Smith are examining the following statement of cash flows for Carpino Company for the year ended January 31, 2007.
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CARPINO COMPANY Statement of Cash Flows For the Year Ended January 31, 2007
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Sources of cash
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From sales of merchandise
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$380,000
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From sale of capital stock
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420,000
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From sale of investment (purchased below)
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80,000
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From depreciation
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55,000
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From issuance of note for truck
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20,000
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From interest on investments
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6,000
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Total sources of cash
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961,000
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Uses of cash
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For purchase of fixtures and equipment
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330,000
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For merchandise purchased for resale
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258,000
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For operating expenses (including depreciation)
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160,000
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For purchase of investment
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75,000
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For purchase of truck by issuance of note
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20,000
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For purchase of treasury stock
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10,000
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For interest on note payable
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3,000
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Total uses of cash
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856,000
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Net increase in cash
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$ 105,000
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Ron claims that Carpino's statement of cash flows is an excellent portrayal of a superb first year with cash increasing $105,000. Lisa replies that it was not a superb first year. Rather, she says, the year was an operating failure, that the statement is presented incorrectly, and that $105,000 is not the actual increase in cash. The cash balance at the beginning of the year was $140,000.
Instructions - With the class divided into groups, answer the following.
1. 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.
2. With whom do you agree, Ron or Lisa? Explain your position.