Question

Mary Walker, president of Rusco Company, considers $47,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $42,000 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	$	42,000		$	65,400
Accounts receivable		232,400			245,100
Inventory		274,300			212,200
Prepaid expenses		25,900			47,400
Total current assets		574,600			570,100
Long-term investments		171,000			255,000
Plant and equipment		914,000			777,000
Less accumulated depreciation		223,500			198,100
Net plant and equipment		690,500			578,900
Total assets	$	1,436,100		$	1,404,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	199,300		$	259,700
Accrued liabilities		10,700			20,400
Income taxes payable		63,600			52,500
Total current liabilities		273,600			332,600
Bonds payable		281,000			134,000
Total liabilities		554,600			466,600
Stockholders’ equity:
Common stock		764,000			735,000
Retained earnings		117,500			202,400
Total stockholders' equity		881,500			937,400
Total liabilities and stockholders' equity	$	1,436,100		$	1,404,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,340,000
Cost of goods sold						837,500
Gross margin						502,500
Selling and administrative expenses						358,450
Net operating income						144,050
Nonoperating items:
Gain on sale of investments	$	33,500
Loss on sale of equipment		(11,400	)			22,100
Income before taxes						166,150
Income taxes						49,710
Net income					$	116,440

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 $65,600. The equipment originally cost $144,000 and had accumulated depreciation of $67,000.

3. Long-term investments that cost $84,000 were sold during the year for $117,500.

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

1) Rusco Company Direct Method of Determining the Net Cash Flows from Operating Activities Sales 1,340,000 Adjustment to a cash basis: Decrease in Accounts receivable (245,100-232,400) 12,700 Cash Received from Customer (A) 1,352,700 Cost of Goods sold 837,500 Adjustment to a cash basis: Increase in Inventory (274,300 - 212,200) 62,100 Decrease in Accounts payable (199,300 - 259,700) 60,400 Cash Payment to supplier (B) 960,000 Selling and Administrative expense 358,450 Adjustment to a cash basis: Decrease in prepaid expense (25,900- 47,400) (21,500) Decrease in accured Liabilities (10,700 -20,400) 9,700 Depreciation expense (92,400) Cash paid for Selling and administrative expense (C) 254,250 Income taxes 49,710 Adjustment to a cash basis: Increase in Income tax payable (63,600 -52,500) (11,100) Cash paid for Income taxes (D) 38,610 Net Cash provided by operating activities (A -B-C-D) 99,840

1,352,700 Rusco Company Statement of Cash Flows For This Year Ended July 31 Operating activities: Cash Received from customer Less cash disbursements for: Cost of merchandise purchased Selling and administrative expense Income taxes Total Cash disbursement Net Cash provided by operating activities (a) (960,000) (254,250) (38,610) (1,252,860) 99,840 Investing Activities: Proceeds from Sale of Investment Proceeds from Sale of Equipment Additions to Property, Plant and Equipment Net Cash used in Investing Activities (b) 117,500 65,600 (281,000) (97,900) Financing Activities Issuance of bonds payable(281,000 -134,000) Issuance of Common stock (764,000 - 735,000) Cash dividends paid Net Cash used in Financing Activities (c) 147,000 29,000 (201,340) (25,340) Net Decrease in cash during the year (a+b+c) Beginning cash and cash equivalents Ending cash and cash equivalents (23,400) 65,400 42,000

Working Notes: Calculation of Depreciation expense Increase in Accumulated Depreciation (223,500 -198,100) Add: Accumulated Depreciation on equipment sold Total Depreciation expense 25,400 67,000 92,400 Purchase of Equipment Increase in plant and equipment (914,000 - 777,000) Add: Cost of equipment sold Purchase of Plant and Equipment 137,000 144,000 281,000 Payment of Dividends Retained Earning Last year Add: Net Income 202,400 116,440 318,840 (117,500) 201,340 Retained Earning This year Dividend paid