Question

Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 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	$	8,000		$	21,000
Accounts receivable		120,000			80,000
Inventory		140,000			90,000
Prepaid expenses		5,000			9,000
Total current assets		273,000			200,000
Long-term investments		50,000			70,000
Plant and equipment		430,000			300,000
Less accumulated depreciation		60,000			50,000
Net plant and equipment		370,000			250,000
Total assets	$	693,000		$	520,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	123,000		$	60,000
Accrued liabilities		8,000			17,000
Income taxes payable		20,000			12,000
Total current liabilities		151,000			89,000
Bonds payable		70,000			0
Total liabilities		221,000			89,000
Stockholders’ equity:
Common stock		366,000			346,000
Retained earnings		106,000			85,000
Total stockholders' equity		472,000			431,000
Total liabilities and stockholders' equity	$	693,000		$	520,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	500,000
Cost of goods sold						300,000
Gross margin						200,000
Selling and administrative expenses						158,000
Net operating income						42,000
Nonoperating items:
Gain on sale of investments	$	10,000
Loss on sale of equipment		(2,000)				8,000
Income before taxes						50,000
Income taxes						20,000
Net income					$	30,000

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 $8,000. The equipment originally cost $20,000 and had accumulated depreciation of $10,000.

3. Long-term investments that cost $20,000 were sold during the year for $30,000.

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.

Answer 1