Question

Mary Walker, president of Rusco Company, considers $27,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $22,000 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	$	22,000		$	41,400
Accounts receivable		229,800			219,100
Inventory		256,300			200,200
Prepaid expenses		11,900			23,400
Total current assets		520,000			484,100
Long-term investments		111,000			155,000
Plant and equipment		874,000			757,000
Less accumulated depreciation		213,500			192,100
Net plant and equipment		660,500			564,900
Total assets	$	1,291,500		$	1,204,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	237,700		$	176,400
Accrued liabilities		8,700			16,400
Income taxes payable		47,600			42,500
Total current liabilities		294,000			235,300
Bonds Payable		221,000			114,000
Total liabilities		515,000			349,300
Stockholders’ equity:
Common stock		657,500			635,000
Retained earnings		119,000			219,700
Total stockholders' equity		776,500			854,700
Total liabilities and stockholders' equity	$	1,291,500		$	1,204,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	940,000
Cost of goods sold						587,500
Gross margin						352,500
Selling and administrative expenses						251,450
Net operating income						101,050
Nonoperating items:
Gain on sale of investments	$	23,500
Loss on sale of equipment		(7,400	)			16,100
Income before taxes						117,150
Income taxes						35,110
Net income					$	82,040

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 $49,600. The equipment originally cost $104,000 and had accumulated depreciation of $47,000.
3. Long-term investments that cost $44,000 were sold during the year for $67,500.
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.

Answer 1

Answer-1)- Using the indirect method, the net cash provided by/used in operating activities for this year =

RUSCO COMPANY
STATEMENT OF CASH FLOWS PARTIAL (USING INDIRECT METHOD)
FOR THE YEAR ENDED JULY 31
Particulars		Amount
		$
Cash flow from operating activities
Net Income		82040
Adjustments to reconcile net income to net cash provided by operating activities
Adjustment for non cash effects
Depreciation expense		68400
Gain on sale of investments		-23500
Loss on sale of equipment		7400
Change in operating assets & liabilities
Increase in Accounts receivable		-10700
Increase in inventory		-56100
Decrease in prepaid expenses		11500
Increase in accounts payable		61300
Decrease in accrued liabilities		-7700
Increase in income taxes payable		5100
Net cash flow from operating activities		137740

2)- A statement of cash flows for this year-

RUSCO COMPANY
STATEMENT OF CASH FLOWS (USING INDIRECT METHOD)
FOR THE YEAR ENDED JULY 31
Particulars		Amount
		$
Cash flow from operating activities
Net Income		82040
Adjustments to reconcile net income to net cash provided by operating activities
Adjustment for non cash effects
Depreciation expense		68400
Gain on sale of investments		-23500
Loss on sale of equipment		7400
Change in operating assets & liabilities
Increase in Accounts receivable		-10700
Increase in inventory		-56100
Decrease in prepaid expenses		11500
Increase in accounts payable		61300
Decrease in accrued liabilities		-7700
Increase in income taxes payable		5100
Net cash flow from operating activities (a)		137740
Cash Flow from Investing activities
Old equipment sold		49600
New equipment purchased		-221000
Long-term inevstments sold		67500
Net cash Flow from Investing activities (b)		-103900
Cash Flow from Financing activities
Cash dividends paid	($219700+$82040-$119000)	-182740
Common stock issued		22500
Bonds payable issued		107000
Net cash flow (used for) Financing activities (c)	-53240
Net Change in cash c=a+b+c		-19400
Beginning cash balance		41400
Closing cash balance		22000

3)- . Free cash flow for the year = ($266000).

Explanation-Free cash flow = Net cash provided by operating activities- Capital expenditure - Cash dividends paid

= $137740 - $221000 - $182740

= $(266000)