Question

Problem 12-13A Prepare and Interpret a Statement of Cash Flows; Free Cash Flow [LO12-1, LO12-2, LO12-3] Mary Walker, president of Rusco Company, considers $36,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $31,000 in cash was available at the end of 2015. 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 July 31, 2015 and 2014 2015 2014 Assets Current assets: Cash $ 31,000 $ 52,200 Accounts Receivable 219,200 230,800 Inventory 264,400 205,600 Prepaid expenses 18,200 34,200 Total current assets 532,800 522,800 Long-term investments 138,000 200,000 Plant and equipment 892,000 766,000 Less accumulated depreciation 218,000 194,800 Net plant and equipment 674,000 571,200 Total assets $ 1,344,800 $ 1,294,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 189,400 $ 247,600 Accrued liabilities 9,600 18,200 Income taxes payable 54,800 47,000 Total current liabilities 253,800 312,800 Bonds Payable 248,000 0 Total liabilities 501,800 312,800 Stockholders’ equity: Common stock 705,000 680,000 Retained earnings 138,000 301,200 Total stockholders' equity 843,000 981,200 Total liabilities and stockholders' equity $ 1,344,800 $ 1,294,000 Rusco Company Income Statement For the Year Ended July 31, 2015 Sales $ 1,120,000 Cost of goods sold 700,000 Gross margin 420,000 Selling and administrative expenses 299,600 Net operating income 120,400 Nonoperating items: Gain on sale of investments $28,000 Loss on sale of equipment (9,200) 18,800 Income before taxes 139,200 Income taxes 41,680 Net income $ 97,520 The following additional information is available for the year 2015. a. The company declared and paid a cash dividend. b. Equipment was sold during the year for $56,800. The equipment had originally cost $122,000 and had accumulated depreciation of $56,000. c. Long-term investments that had cost $62,000 were sold during the year for $90,000. d. 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 operating activities for 2015. (Negative amount should be indicated by a minus sign.) 2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for 2015. (List any deduction in cash and cash outflows as negative amounts.) 3. Compute free cash flow for 2015. (Negative amount should be indicated by a minus sign.)

Answer 1

Solution 1:

Rusco Company
Statement of Cash Flows (Partial) (Indirect Method)
For year ended December 31, 2016
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$97,520.00
Adjustments to reconcile net income to net cash flow from operating activitiess:
Gain on sale of investment	-$28,000.00
Loss on sale of equipment	$9,200.00
Depreciation ($218,000 - $194,800 + $56,000)	$79,200.00
Changes in current operating assets and liabilities:
Decrease in accounts receivables ($230,800 - $219,200)	$11,600.00
Increase in inventories ($264,400 - $205,600)	-$58,800.00
Decrease in prepaid expenses ($34,200 - $18,200)	$16,000.00
Decrease in accounts payable ($247,600 - $189,400)	-$58,200.00
Decrease in accrued liabilities ($18,200 - $9600)	-$8,600.00
Increase in income tax payable ($54,800 - $47,000)	$7,800.00
Net cash flow from operating activities		$67,720.00

Solution 2:

Rusco Company
Statement of Cash Flows (Indirect Method)
For year ended December 31, 2015
Particulars	Details	Amount
Net cash flow from operating activities		$67,720.00
Cash Flow from Investing Activities:
Cash received from sale of Equipment	$56,800.00
Cash received from sale of long term investment	$90,000.00
Cash paid for purchase of equipment ($892,000 - $766,000 + $122,000)	-$248,000.00
Net cash flow used for investing activities		-$101,200.00
Cash Flow from Financing Activities:
Proceed from issue of bond	$248,000.00
Proceed from issue of common stock	$25,000.00
Cash paid for dividends ($301,200 + $97,520 - $138,000)	-$260,720.00
Net cash flow from financing activities		$12,280.00
Net Increase / (Decrease) in Cash		-$21,200.00
Cash balance at beginning of year		$52,200.00
Cash balance at end of year		$31,000.00

Solution 3:

Free cash flow = Operating cash flow - Capital expenditure = $67,720 - $248,000 = -$180,280