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You have been asked to settle an argument between a client and his inexperienced bookkeeper. Presented below is a Statement of Cash Flows prepared by the bookkeeper.

Beautiful Apparel

Statement of Cash Flows

January 31, 2022

Sources of cash

From sales of merchandise $382,000

From sale of common 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

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

The bookkeeper claims this statement is an excellent portrayal of a great first year with an increase in cash of $109,000. Your client claims that the first year of operations was an operating failure and the $109,000 is not the increase in cash. Using the statement above, prepare a statement of cash flows in proper form using the indirect method. The only noncash items in income are depreciation and the gain from the sale of the investment (the purchase and the sale are related). With whom do you agree, your client or the bookkeeper? Explain your position.

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