Question

Problem 13-13 Prepare and Interpret a Statement of Cash Flows; Free Cash Flow [LO13-1, LO13-2, LO13-3]

Mary Walker, president of Rusco Company, considers $40,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $35,000 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 and cash equivalents	$	35,000		$	57,000
Accounts receivable		248,000			236,000
Inventory		268,000			208,000
Prepaid expenses		21,000			39,000
Total current assets		572,000			540,000
Long-term investments		150,000			220,000
Plant and equipment		900,000			770,000
Less accumulated depreciation		220,000			196,000
Net plant and equipment		680,000			574,000
Total assets	$	1,402,000		$	1,334,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	252,000		$	179,000
Accrued liabilities		10,000			19,000
Income taxes payable		58,000			49,000
Total current liabilities		320,000			247,000
Bonds Payable		260,000			140,000
Total liabilities		580,000			387,000
Stockholders’ equity:
Common stock		755,000			700,000
Retained earnings		67,000			247,000
Total stockholders' equity		822,000			947,000
Total liabilities and stockholders' equity	$	1,402,000		$	1,334,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,200,000
Cost of goods sold						750,000
Gross margin						450,000
Selling and administrative expenses						321,000
Net operating income						129,000
Nonoperating items:
Gain on sale of investments	$	30,000
Loss on sale of equipment		(10,000	)			20,000
Income before taxes						149,000
Income taxes						44,600
Net income					$	104,400

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 $60,000. The equipment originally cost $130,000 and had accumulated depreciation of $60,000.
3. Long-term investments that cost $70,000 were sold during the year for $100,000.
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