(SCF Theory and Analysis of Improper SCF) 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, 2012
Sources of cash	Â
From sales of merchandise	$ 382,000
From sale of capital 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	Â
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

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 noncash items in income are depreciation and the gain from the sale of the investment (purchase and sale are related).