Question

Mary Walker, president of Rusco Company, considers $46,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $41,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker.

Rusco Company Comparative Balance Sheet at July 31
	This Year			Last Year
Assets
Current assets:
Cash	$	41,000		$	64,200
Accounts Receivable		256,400			243,800
Inventory		273,400			211,600
Prepaid expenses		25,200			46,200
Total current assets		596,000			565,800
Long-term investments		168,000			250,000
Plant and equipment		912,000			776,000
Less accumulated depreciation		223,000			197,800
Net plant and equipment		689,000			578,200
Total assets	$	1,453,000		$	1,394,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	258,600		$	180,200
Accrued liabilities		10,600			20,200
Income taxes payable		62,800			52,000
Total current liabilities		332,000			252,400
Bonds Payable		278,000			152,000
Total liabilities		610,000			404,400
Stockholders’ equity:
Common stock		800,000			730,000
Retained earnings		43,000			259,600
Total stockholders' equity		843,000			989,600
Total liabilities and stockholders' equity	$	1,453,000		$	1,394,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,320,000
Cost of goods sold						825,000
Gross margin						495,000
Selling and administrative expenses						353,100
Net operating income						141,900
Nonoperating items:
Gain on sale of investments	$	33,000
Loss on sale of equipment		(11,200	)			21,800
Income before taxes						163,700
Income taxes						48,980
Net income					$	114,720

The following additional information is available for this year.

1. The company declared and paid a cash dividend.
2. Equipment was sold during the year for $64,800. The equipment originally cost $142,000 and had accumulated depreciation of $66,000.
3. Long-term investments that cost $82,000 were sold during the year for $115,000.
4. The company did not retire any bonds payable or repurchase any of its common stock.

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for this year.

2. Prepare a statement of cash flows for this year.

3. Compute free cash flow for this year.

Answer 1

Part 1 : Net cash provided by/used in operating activities

Part 2 : Statement of Cash Flows

Part 3 : Free Cash flow

Free cash flow = Net cash provided by operating activities - Capital expenditure - Dividend paid

Net cash provided by operating activities = $210,320

Capital expenditure = $278,000

Dividend Paid = $331,320

Free cash flow = $210,320 - $278,000 - $331,320 = ($399,000)

All the best...