Question

In: Accounting

Mary Walker, president of Rusco Company, considers $41,000 to be the minimum cash balance for operating...

Mary Walker, president of Rusco Company, considers $41,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $36,000 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 $ 36,000    $ 58,200   
     Accounts Receivable 225,200    237,300   
     Inventory 268,900    208,600   
     Prepaid expenses 21,700    40,200   
  Total current assets 551,800    544,300   
  Long-term investments 153,000    225,000   
  Plant and equipment 902,000    771,000   
     Less accumulated depreciation 220,500    196,300   
  Net plant and equipment 681,500    574,700   
  Total assets
$ 1,386,300    $ 1,344,000   
  Liabilities and Stockholders' Equity
  Current liabilities:
     Accounts payable $ 193,900    $ 253,100   
     Accrued liabilities 10,100    19,200   
  Income taxes payable 58,800    49,500   
  Total current liabilities 262,800    321,800   
  Bonds Payable 263,000    0   
  Total liabilities 525,800    321,800   
  Stockholders’ equity:
     Common stock 735,000    705,000   
     Retained earnings 125,500    317,200   
  Total stockholders' equity 860,500    1,022,200   

  Total liabilities and stockholders' equity $ 1,386,300    $ 1,344,000   
Rusco Company
Income Statement
For the Year Ended July 31, 2015
  Sales $ 1,220,000    
  Cost of goods sold 762,500    
  Gross margin 457,500    
  Selling and administrative expenses 326,350    
  Net operating income 131,150    
  Nonoperating items:
     Gain on sale of investments $30,500
     Loss on sale of equipment (10,200) 20,300    
  Income before taxes 151,450    
  Income taxes 45,330    
  Net income $ 106,120    
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 $60,800. The equipment had originally cost $132,000 and had accumulated depreciation of $61,000.
c. Long-term investments that had cost $72,000 were sold during the year for $102,500.
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. (Negative amount should be indicated by a minus sign.)

Solutions

Expert Solution

1.

Rusco Company
Cash Flow Statement  
For the year ended July 31, 2015
Cash flows from operating activities
Net Income $ 106,120
Adjustment to reconcile net income to:
Depreciation expense $   85,200 220500-196300+61000
Gain on sale of investment $ (30,500)
Loss on sale of equipment $   10,200
Decrease in accounts receivable $   12,100 237300-225200
Increase in inventory $ (60,300) 208600-268900
Decrease in prepaid expenses $   18,500 40200-21700
Decrease in accounts payable $ (59,200) 193900-253100
Decrease in accrued payable $   (9,100) 10100-19200
Increase in Incometax payable $      9,300 58800-49500
$ (23,800)
Net cash flow from operating activities $    82,320

2.

Rusco Company
Cash Flow Statement  
For the year ended July 31, 2015
Cash flows from operating activities
Net Income $ 106,120
Adjustment to reconcile net income to:
Depreciation expense $      85,200 220500-196300+61000
Gain on sale of investment $   (30,500)
Loss on sale of equipment $      10,200
Decrease in accounts receivable $      12,100 237300-225200
Increase in inventory $   (60,300) 208600-268900
Decrease in prepaid expenses $      18,500 40200-21700
Decrease in accounts payable $   (59,200) 193900-253100
Decrease in accrued payable $      (9,100) 10100-19200
Increase in Incometax payable $        9,300 58800-49500
$ (23,800)
Net cash flow from operating activities $    82,320
Cash flows from investing activities
Cash received from sale of equipment $      60,800
Cash received from sale of investments $   102,500
Cash paid for Purchase of equipment $ (263,000) 771000-902000-132000
Net cash used for investing activities $ (99,700)
Cash flows from financing activities
Cash received from issuance of common stock $      30,000 735000-705000
Cash paid for dividend $ (297,820) 125500-317200-106120
Cash from issue of bonds $   263,000
Net cash flow from financing activities $    (4,820)
Net increase in cash and cash equivalents $ (22,200)
Cash and cash equivalents at beginning of period $    58,200
Cash and cash equivalents at end of period $    36,000

3.

Net cash flow from operating activities $      82,320
Less: Capital expenditure $ (263,000)
Less: Dividend $ (297,820)
Free cash flow $ (478,500)

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