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

Answer

Cash Flow Statement
	Detail	Net
Cash Flow from Operating Activities
Net Income before taxes		168,600
Add: Non cash and Non operating Expenses
Depreciation	93,600
Loss on sale of Equipment	11,600
Less: Non cash and Non Operating Incomes
Gain on sale of Investment	(34,000)
Working Capital Changes
Decrease in Accounts Receivable	12,800
Increase in Inventory	(62,400)
Decrease in Prepaid expenses	22,000
Decrease in Accounts Payable	(60,600)
Decrease in Accrued Liabilities	(9,800)
Income Taxes Paid	(39,040)
Cash Flow from Operating Activities (A)		102,760
Cash Flow from Investing Activities
Sale of Equipment	66,400
Purchases of Equipment	(284,000)
Sale of Investment	120,000
Cash Used in Investing Activities (B)		(97,600)
Cash Flow from Financing Activities
Issue of Bonds	128,000
Dividend Paid [118,160 - 36,400 (Increase in Retained Earnings)]	(81,760)
Purchase of Common Shares	(75,000)
Cash used in Financing Activities ( C)		(28,760)
Decrease in Cash (A+B+C)		(23,600)
Opening Cash		66,600
Closing Cash		43,000

Euipment
Beg. Bal	778,000	Bank	66,400
		Acc. Depreciation	68,000
		P&l (Loss on sale)	11,600
Bank (Purchases)(Bal.)	284,000
		Closing Bal.	916,000
Total	1,062,000	Total	1,062,000
Acc. Depreciation - Equipment
		Beg. Bal	198,400
Equipment (Sold)	68,000	P&L (Current Year)(Bal.)	93,600
Closing Bal.	224,000
Total	292,000	Total	292,000
Income Tax payable
		Beg. Bal	53,000
Bank (Paid) (Bal.)	39,040	P&L (Current Year)	50,440
Closing Bal.	64,400
Total	103,440	Total	103,440

3.

Free cash flow = Cash flow from Operating activities – Purchase of Equipment – Purchase of common shares

= $102,760 – 284,000 – 75,000

Free cash flow = ($256,240)