CA NO: 2

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

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

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PACIFIC CLOTHING STORE

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STATEMENT OF CASH FLOWS

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FOR THE YEAR ENDED JANUARY 31, 2014

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Sources of cash

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From sales of merchandise $ 382,000

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From sale of capital stock 380,000

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From sale of investment 120,000

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From depreciation 80,000

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From issuance of note for truck 30,000

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From interest on investments 8,000

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Total sources of cash 1,000,000

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PACIFIC CLOTHING STORE

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STATEMENT OF CASH FLOWS

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FOR THE YEAR ENDED JANUARY 31, 2014

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(CONTINUED)

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Uses of cash

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For purchase of fi xtures and equipment 330,000

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For merchandise purchased for resale 253,000

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For operating expenses (including depreciation) 170,000

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For purchase of investment 95,000

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For purchase of truck by issuance of note 30,000

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For purchase of treasury stock 10,000

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For interest on note 3,000

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Total uses of cash 891,000

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Net increase in cash $ 109,000

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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.

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Instructions

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

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(b) Using the data provided, prepare a statement of cash flows in proper indirect method form.

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The only noncash items in income are depreciation and the gain from the sale of the investment

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 purchase and sale are related).

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