Question

Mary Walker, president of Rusco Company, considers $43,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $38,000 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	$	38,000		$	60,600
Accounts receivable		252,200			239,900
Inventory		270,700			209,800
Prepaid expenses		23,100			42,600
Total current assets		584,000			552,900
Long-term investments		159,000			235,000
Plant and equipment		906,000			773,000
Less accumulated depreciation		221,500			196,900
Net plant and equipment		684,500			576,100
Total assets	$	1,427,500		$	1,364,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	255,300		$	179,600
Accrued liabilities		10,300			19,600
Income taxes payable		60,400			50,500
Total current liabilities		326,000			249,700
Bonds Payable		269,000			146,000
Total liabilities		595,000			395,700
Stockholders’ equity:
Common stock		777,500			715,000
Retained earnings		55,000			253,300
Total stockholders' equity		832,500			968,300
Total liabilities and stockholders' equity	$	1,427,500		$	1,364,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,260,000
Cost of goods sold						787,500
Gross margin						472,500
Selling and administrative expenses						337,050
Net operating income						135,450
Nonoperating items:
Gain on sale of investments	$	31,500
Loss on sale of equipment		(10,600	)			20,900
Income before taxes						156,350
Income taxes						46,790
Net income					$	109,560

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 $62,400. The equipment originally cost $136,000 and had accumulated depreciation of $63,000.
3. Long-term investments that cost $76,000 were sold during the year for $107,500.
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.

Using the indirect method, compute the net cash provided by/used in operating activities for this year. (List any deduction in cash and cash outflows as negative amounts.)

Rusco Company Statement of Cash Flows—Indirect Method (partial) 0 $0

Using the indirect method, compute the net cash provided by/used in operating activities for this year. (List any deduction in cash and cash outflows as negative amounts.)

	Rusco Company Statement of Cash Flows For This Year Ended July 31 Operating activities: Investing activities: 0 Financing activities: 0 0 Beginning cash and cash equivalents Ending cash and cash equivalents $0

Compute free cash flow for this year. (Negative amount should be indicated by a minus sign.)

	Free cash flow

Answer 1