Question

Mary Walker, president of Rusco Company, considers $42,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $37,000 in cash was available at the end of this year. 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 at July 31
	This Year			Last Year
Assets
Current assets:
Cash	$	37,000		$	59,400
Accounts Receivable		250,800			238,600
Inventory		269,800			209,200
Prepaid expenses		22,400			41,400
Total current assets		580,000			548,600
Long-term investments		156,000			230,000
Plant and equipment		904,000			772,000
Less accumulated depreciation		221,000			196,600
Net plant and equipment		683,000			575,400
Total assets	$	1,419,000		$	1,354,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	179,400		$	254,200
Accrued liabilities		10,200			19,400
Income taxes payable		59,600			50,000
Total current liabilities		249,200			323,600
Bonds Payable		266,000			144,000
Total liabilities		515,200			467,600
Stockholders’ equity:
Common stock		770,000			710,000
Retained earnings		133,800			176,400
Total stockholders' equity		903,800			886,400
Total liabilities and stockholders' equity	$	1,419,000		$	1,354,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,240,000
Cost of goods sold						775,000
Gross margin						465,000
Selling and administrative expenses						331,700
Net operating income						133,300
Nonoperating items:
Gain on sale of investments	$	31,000
Loss on sale of equipment		(10,400	)			20,600
Income before taxes						153,900
Income taxes						46,060
Net income					$	107,840

The following additional information is available for this year.

The company declared and paid a cash dividend.

Equipment was sold during the year for $61,600. The equipment originally cost $134,000 and had accumulated depreciation of $62,000.

Long-term investments that cost $74,000 were sold during the year for $105,000.

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/used in operating activities for this year.

2. Prepare a statement of cash flows for this year.

3. Compute free cash flow for this year.

Using the indirect method, compute the net cash provided by/used in operating activities for this year. (List any deduction in cash and cash outflows as negative amounts.)

	Rusco Company Statement of Cash Flows—Indirect Method (partial) 0 $0

Prepare a statement of cash flows for this year. (List any deduction in cash and cash outflows as negative amounts.)

	Rusco Company Statement of Cash Flows For This Year Ended July 31 Operating activities: Investing activities: 0 Financing activities: 0 0 Beginning cash and cash equivalents Ending cash and cash equivalents $0

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

	Free cash flow

Answer 1

1

Using the indirect method, compute the net cash provided by/used in operating activities for this year.

Net cash for operating activities

45440

Working for the answer

Cash Flow statement
Cash flows from operating activities
Net income		107840
Adjustment to reconcile net income
non cash expenses - Depreciation	86400
Non operating gains	-31000
non operating losses	10400
Increase in accounts receivable	-12200
Increase in inventory	-60600
Decrease in prepaid Expanses	19000
Decrease in accounts payable	-74800
Decrease in accrued liabilities	-9200
Increase in income taxes payable	9600	-62400
Net cash for operating activities		45440

2

Cash Flow statement
Cash flows from operating activities
Net income		107840
Adjustment to reconcile net income
non cash expenses - Depreciation	86400
Non operating gains	-31000
non operating losses	10400
Increase in accounts receivable	-12200
Increase in inventory	-60600
Decrease in prepaid Expases	19000
Decrease in accounts payable	-74800
Decrease in accrued liabilities	-9200
Increase in income taxes payable	9600	-62400
Net cash for operating activities		45440
2) Investing activites
Addittions to equipment	-266000
proceeds from sale of equipment	61600
proceeds from sale of investment	105000
Cash flow from Investing activity		-99400
3) financing acivities
increase in bonds payable	122000
Common stock decrease	60000
Cash dividend paid	-150440
Decrease in cash from financing activities		31560
Net decrease in cash and cash eqivalents		-22400
Cash at the beginning of the yr		59400
cash at the end of the yr		37000

3

Net cash provided by operating activities		45440
Capital expenditures	-266000
Dividends	-150440	-416440
Free cash flow		-371000

Free cash flow

-371000