Question

Mary Walker, president of Rusco Company, considers $36,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $31,000 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 and cash equivalents	$	31,000		$	52,200
Accounts receivable		219,200			230,800
Inventory		264,400			205,600
Prepaid expenses		18,200			34,200
Total current assets		532,800			522,800
Long-term investments		138,000			200,000
Plant and equipment		892,000			766,000
Less accumulated depreciation		218,000			194,800
Net plant and equipment		674,000			571,200
Total assets	$	1,344,800		$	1,294,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	189,400		$	247,600
Accrued liabilities		9,600			18,200
Income taxes payable		54,800			47,000
Total current liabilities		253,800			312,800
Bonds payable		248,000			132,000
Total liabilities		501,800			444,800
Stockholders’ equity:
Common stock		698,800			680,000
Retained earnings		144,200			169,200
Total stockholders' equity		843,000			849,200
Total liabilities and stockholders' equity	$	1,344,800		$	1,294,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,120,000
Cost of goods sold						700,000
Gross margin						420,000
Selling and administrative expenses						299,600
Net operating income						120,400
Nonoperating items:
Gain on sale of investments	$	28,000
Loss on sale of equipment		(9,200	)			18,800
Income before taxes						139,200
Income taxes						41,680
Net income					$	97,520

The following additional information is available for this year.

1. The company declared and paid a cash dividend.

2. Equipment was sold during the year for $56,800. The equipment originally cost $122,000 and had accumulated depreciation of $56,000.

3. Long-term investments that cost $62,000 were sold during the year for $90,000.

4. The company did not retire any bonds payable or repurchase any of its common stock.

Because the Cash account decreased so dramatically during this year, the company’s executive committee is anxious to see how the income statement would appear on a cash basis.

Required:

1. Using the direct method, adjust the company’s income statement for this year to a cash basis.

2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for this year.

Answer 1

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