Question

Cheryl Wilson, president of Rivers Company, considers $39,000 to be a minimum cash balance for operating purposes. As can be seen from the following statements, only $34,000 in cash was available at the end of 2011. Because the company reported a large net income for the year, and also issued bonds and sold some long-term investments, the sharp decline in cash is puzzling to Ms. Feldman.

Rivers Company Comparative Balance Sheet December 31, 2011, and 2010
	2011		2010
Assets
Current assets:
Cash	$	34,000	$	55,800
Accounts Receivable		222,800		234,700
Inventory		267,100		207,400
Prepaid expenses		20,300		37,800
Total current assets		544,200		535,700
Long-term investments		147,000		215,000
Plant and equipment		898,000		769,000
Less accumulated depreciation		219,500		195,700
Net plant and equipment		678,500		573,300
Total assets	$	1,369,700	$	1,324,000
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable	$	192,100	$	250,900
Accrued liabilities		9,900		18,800
Income taxes payable		57,200		48,500
Total current liabilities		259,200		318,200
Bonds Payable		257,000		138,000
Total liabilities		516,200		456,200
Stockholders’ equity:
Common stock		642,500		695,000
Retained earnings		211,000		172,800
Total stockholders' equity		853,500		867,800
Total liabilities and stockholders' equity	$	1,369,700	$	1,324,000

Rivers Company Income Statement For the Year Ended December 31, 2011
Sales		$	1,180,000
Cost of goods sold			737,500
Gross margin			442,500
Selling and administrative expenses			315,650
Net operating income			126,850
Non operating items:
Gain on sale of investments	$29,500
Loss on sale of equipment	(9,800)		19,700
Income before taxes			146,550
Income taxes			43,870
Net income		$	102,680
The following additional information is available for the year 2011: a. The company sold long-term investments with an original cost of $68,000 for $97,500 during the year. b. Equipment that had cost $128,000 and on which there was $59,000 in accumulated depreciation was sold during the year for $59,200. c. The company declared and paid a cash dividend during the year. d. The stock of a dissident stockholder was repurchased for cash and retired during the year. No issues of stock were made. e. The company did not retire any bonds during the year. Required: 1. Using the indirect method, determine the net cash provided by (used in) operating activities for 2011. (Negative amount should be indicated by a minus sign.) 2. Prepare a statement of cash flows for 2011. (Amounts to be deducted and negative amounts should be indicated with a minus sign.) Rivers Company Statement of Cash Flows - Indirect Method For the Year Ended December 31, 2011 Operating activities: Adjustments to convert net income to cash basis: 0 0 Investing activities: 0 Financing activities: 0 0 Cash balance, beginning of year Cash balance, end of year $0

3.	Compute free cash flow for 2011. (Negative amount should be indicated by a minus sign.)

Answer 1

Requirement 1

Cash Flows from Operating Activity
Net Income		$        102,680.00
Adjustments to reconcile net income to net cash flows from Operating Activities
Depreciation expense	$     82,800.00
Gain on sale of Investment	$   -29,500.00
Loss on sale of equipment	$       9,800.00
Changes In Current Assets and Current Liabilities
Decrease in Accounts Receivable	$     11,900.00
Increase in Inventory	$   -59,700.00
Decrease in Prepaid Expenses	$     17,500.00
Decrease in Accounts Payable	$   -58,800.00
Increase in Income tax payable	$       8,700.00
Decrease in Accrued Liability	$    -8,900.00
		$        -26,200.00
Net cash flow from Operating activities		$          76,480.00

Requirement 2

Rivers Company
Statement of Cash Flows
For the Year ended December 31,2011
A. Cash Flows from Operating Activity
Net Income		$        102,680.00
Adjustments to reconcile net income to net cash flows from Operating Activities
Depreciation expense	$     82,800.00
Gain on sale of Investment	$   -29,500.00
Loss on sale of equipment	$       9,800.00
Changes In Current Assets and Current Liabilities
Decrease in Accounts Receivable	$     11,900.00
Increase in Inventory	$   -59,700.00
Decrease in Prepaid Expenses	$     17,500.00
Decrease in Accounts Payable	$   -58,800.00
Increase in Income tax payable	$       8,700.00
Decrease in Accrued Liability	$    -8,900.00
		$        -26,200.00
Net cash flow from Operating activities		$          76,480.00
B. Cash flows from Investing Activities
Sales of Investment	$     97,500.00
Purchase of Equipment	$-257,000.00
Sale Of Equipment	$     59,200.00
Net Cash Used in Investing activities		$     -100,300.00
C. Cash Flows from Financing activities
Retirement of Common stock	$   -52,500.00
Proceeds from Bonds Issue	$   119,000.00
Dividends Paid	$   -64,480.00
Cash flows from Financing activities		$            2,020.00
Net Increase (Decrease) in Cash [A+B+C]		$        -21,800.00
Cash at the beginning		$          55,800.00
Cash at the end		$          34,000.00

Free Cash Flow

Operating Cash flow - Cash used in Investing Activities

($76480-100300)

$ -23,820.00

Working Note 1 equipment purchased

Closing value of Equipment account in 2010	$ 769,000.00
Less: Equipment sold	$ 128,000.00
	$ 641,000.00
Less: Closing value of equipment in 2011	$ 898,000.00
Purchase of equipment	$ 257,000.00

Working note 2 – Depreciation expense for current year

  

Closing value of Accumulated depreciation account in 2010	$ 195,700.00
Less: Accumulated Depreciation on asset sold	$    59,000.00
	$ 136,700.00
Closing value of Accumulated depreciation account in 2011	$ 219,500.00
Depreciation expense for the year	$    82,800.00