Question

Mary Walker, president of Rusco Company, considers $45,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $40,000 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	$	40,000		$	63,000
Accounts receivable		230,000			242,500
Inventory		272,500			211,000
Prepaid expenses		24,500			45,000
Total current assets		567,000			561,500
Long-term investments		165,000			245,000
Plant and equipment		910,000			775,000
Less accumulated depreciation		222,500			197,500
Net plant and equipment		687,500			577,500
Total assets	$	1,419,500		$	1,384,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	197,500		$	257,500
Accrued liabilities		10,500			20,000
Income taxes payable		62,000			51,500
Total current liabilities		270,000			329,000
Bonds payable		275,000			130,000
Total liabilities		545,000			459,000
Stockholders’ equity:
Common stock		750,700			725,000
Retained earnings		123,800			200,000
Total stockholders' equity		874,500			925,000
Total liabilities and stockholders' equity	$	1,419,500		$	1,384,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,300,000
Cost of goods sold						812,500
Gross margin						487,500
Selling and administrative expenses						347,750
Net operating income						139,750
Nonoperating items:
Gain on sale of investments	$	32,500
Loss on sale of equipment		(11,000	)			21,500
Income before taxes						161,250
Income taxes						48,250
Net income					$	113,000

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 $64,000. The equipment originally cost $140,000 and had accumulated depreciation of $65,000.

3. Long-term investments that cost $80,000 were sold during the year for $112,500.

4. The company did not retire any bonds payable or repurchase any of its common stock.

Because the Cash account decreased so dramatically during this year, the company’s executive committee is anxious to see how the income statement would appear on a cash basis.

Required:

1. Using the direct method, adjust the company’s income statement for this year to a cash basis.

2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for this year.

Using the direct method, adjust the company’s income statement for this year to a cash basis. (Adjustment amounts that are to be deducted should be indicated with a minus sign.)

	Rusco Company Direct Method of Determining the Net Cash flows from Operating activities Adjustments to a cash basis: Adjustments to a cash basis: Selling and administrative expenses Adjustments to a cash basis: Income taxes Adjustments to a cash basis:

Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for this year. (Cash outflows and amounts to be deducted should be indicated with a minus sign.)

	Rusco Company Statement of Cash Flows For the Year Ended July 31, 2014 Operating activities: Cash received from customers Less cash disbursements for: Total cash disbursements Investing activities: Financing activities: Beginning cash and cash equivalents Ending cash and cash equivalents

Answer 1

Answer is given below