Question

Examine the information presented below for Perfect Fit Clothing Store’s first year of business. The Vice President of Sales claims the organization had a fabulous first year based on the SCF. The Controller disagrees noting this year was an operating failure and the statement was incorrectly presented with the $109,000 not representing an actual increase in cash. In your initial post, note who you agree with providing explanations to support your position. In your replies, note any errors presented and analyze the format of the SCF as presented.
Perfect Fit Clothing
Statement of Cash Flows
For the Period Ended December 31, 2016
Sources of Cash
Sale of clothing $382,000
Sale of Capital Stock 380,000
Sale of Investment 120,000
Depreciation 80,000
Issuance of Note for Truck 30,000
Interest on Investments 8,000
Total Sources of Cash $1,000,000
Uses of Cash
Purchase of Furniture and Fixtures $330,000
Purchase of Merchandise (for resale) 253,000
Operating Expenses (includes depreciation) 170,000
Purchase of Investment 95,000
Purchase of Truck with a Note 30,000
Purchase of Treasury Stock 3,000
Total Uses of Cash $891,000
Net Increase in Cash $109,000

Answer 1

Answer:

Explanation:

Cash flow statement should include items that are either received or paid for in cash. In the given case, the following items have been incorrectly reported

Issuance of Note for Truck is a non-cash transaction as well as Purchase of Truck with a Note. There is no cash involved with either transaction. Depreciation is listed in the sources of cash however depreciation is a non-cash operating expense and should not be included. The organization of the statement of cash flows presented in the question is not correct as well. Once organized in the correct manner and adjusted for the depreciation correctly the result is net increase in cash at 119,000 not 109,000. This shows that the Cash flow from operating activities provides a net income of -33,000 which is a loss

Answer 2

Answer:

Explanation:

Adjusted statement of cash flow

Cash inflow

Sale of clothing  - 382000

Sale of capital stock - 380000

sale of investment - 120000

Interest on investment 8000

Total cash inflow - 890000

Uses of cash (Outflow)

Purchase of furniture - 330000

Purchase of merchandise 253000

Operating expenses 90000 (170000-80000)

Purchase of investment - 95000

Purchase of treasury stock - 3000

771000

Adjusted Net increase in cash = $119,000

Cash flow from operating activities

Sales of clothing - 382000

Interest on investment 8000

Purchase of merchandise (253000)

operating expenses (90000)

47,000

Cash flow items is different from profit calculation from the income statement as non cash transaction are exempted in the cash flow .

That explains the error in the given statement as deprecation , issuance of notes for truck were erroneously considered in the income and expenses