Question

Cheryl Wilson, president of Rivers Company, considers $48,000 to be a minimum cash balance for operating purposes. As can be seen from the following statements, only $43,000 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	$	43,000	$	66,600
Accounts Receivable		233,600		246,400
Inventory		275,200		212,800
Prepaid expenses		26,600		48,600
Total current assets		578,400		574,400
Long-term investments		174,000		260,000
Plant and equipment		916,000		778,000
Less accumulated depreciation		224,000		198,400
Net plant and equipment		692,000		579,600
Total assets	$	1,444,400	$	1,414,000
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable	$	200,200	$	260,800
Accrued liabilities		10,800		20,600
Income taxes payable		64,400		53,000
Total current liabilities		275,400		334,400
Bonds Payable		284,000		156,000
Total liabilities		559,400		490,400
Stockholders’ equity:
Common stock		665,000		740,000
Retained earnings		220,000		183,600
Total stockholders' equity		885,000		923,600
Total liabilities and stockholders' equity	$	1,444,400	$	1,414,000

Rivers Company Income Statement For the Year Ended December 31, 2011
Sales		$	1,360,000
Cost of goods sold			850,000
Gross margin			510,000
Selling and administrative expenses			363,800
Net operating income			146,200
Non operating items:
Gain on sale of investments	$34,000
Loss on sale of equipment	(11,600)		22,400
Income before taxes			168,600
Income taxes			50,440
Net income		$	118,160

The following additional information is available for the year 2011:

a. The company sold long-term investments with an original cost of $86,000 for $120,000 during the year.

b. Equipment that had cost $146,000 and on which there was $68,000 in accumulated depreciation was sold during the year for $66,400.

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.)

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

Answer 1

Cash flows from Operating activities:
Net income for the year				118160
Adjustment required for reconciliation
Depreciation		(198400-68000-224000)		93600
Gain on sale of Investment				-34000
Loss on sale of equipment				11600
Decrease in AR				12800
Increase in Inventory				-62400
Decraese in Prepaid expense				22000
Decrease in Accounts Payable				-60600
Decrease in Accrueed liabilities				-9800
Increase in Income tax liability				11400
Net cash provided from Operating activities					102760
CASH FLOW STATEMENT
Cash flows from Operating activities:
Net income for the year				118160
Adjustment required for reconciliation
Depreciation		(198400-68000-224000)		93600
Gain on sale of Investment				-34000
Loss on sale of equipment				11600
Decrease in AR				12800
Increase in Inventory				-62400
Decraese in Prepaid expense				22000
Decrease in Accounts Payable				-60600
Decrease in Accrueed liabilities				-9800
Increase in Income tax liability				11400
Net cash provided from Operating activities					102760
Cash flows from Investing activities
Sale of investment				120000
Sale of Equipmnet				66400
Purchase of equipment (778000-146000-916000)				-284000
Net cash used in investing activities					-97600
Cash flows from Financing activities:
Issue of bonds				128000
Retirment of common stock				-75000
Dividend paid		(183600+118160-220000)		-81760
Net cash used in financing activities					-28760
Net decrease in cash					-23600
Beginning balance of cash					66600
Ending Balance of cash					43000
Ffree Cash flows:
Net cash provided from operating activities					102760
Less: Net cash used in investing activities					-97600
Free cash flows					5160