Question

Mary Walker, president of Rusco Company, considers $35,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $30,000 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 $ 30,000 $ 51,000 Accounts Receivable 218,000 229,500 Inventory 263,500 205,000 Prepaid expenses 17,500 33,000 Total current assets 529,000 518,500 Long-term investments 135,000 195,000 Plant and equipment 890,000 765,000 Less accumulated depreciation 217,500 194,500 Net plant and equipment 672,500 570,500 Total assets $ 1,336,500 $ 1,284,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 188,500 $ 246,500 Accrued liabilities 9,500 18,000 Income taxes payable 54,000 46,500 Total current liabilities 252,000 311,000 Bonds Payable 245,000 0 Total liabilities 497,000 311,000 Stockholders’ equity: Common stock 699,000 675,000 Retained earnings 140,500 298,000 Total stockholders' equity 839,500 973,000 Total liabilities and stockholders' equity $ 1,336,500 $ 1,284,000 Rusco Company Income Statement For the Year Ended July 31, 2015 Sales $ 1,100,000 Cost of goods sold 687,500 Gross margin 412,500 Selling and administrative expenses 294,250 Net operating income 118,250 Nonoperating items: Gain on sale of investments $27,500 Loss on sale of equipment (9,000) 18,500 Income before taxes 136,750 Income taxes 40,950 Net income $ 95,800 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 $56,000. The equipment had originally cost $120,000 and had accumulated depreciation of $55,000. c. Long-term investments that had cost $60,000 were sold during the year for $87,500. 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

Answer 1

Answer:

Net Income = $95,800

Retained Earnings in 2014 = $298,000

Add, Net Income in 2015 =$95,800

Less, Retained earnings in 2015 = $140,500

Dividend paid in 2015 = $253,300

Plant and Equipment:

Plant & Equipment in 2015 = $890,000

Plant $ Equipment in 2104 = $765,000

Purchase of plant & equipment in 2015 = Plant & Equipment in 2015 - (Plant $ Equipment in 2104 - Sale of plant and equipment) = $890,000 - ($765,000 - $120,000) = $245,000

Depreciation for 2015 = Accumulated depreciation in 2015 - (Accumulated depreciation in 2014 - Accumulated depreciation of equipment sold) = $217,500 - ($194,500 - $55,000) = $78,000

Answer 1:

Net cash provided by operating activities for 2015 is prepared below using indirect method:

Answer 2:

Cash flow statement for 2015 is prepared as below:

Answer 3:

Free cash flow = Cash flow from operating activities - Capital Expenditure = $64,800 - $245,000 = - $180,200