Question

Mary Walker, president of Rusco Company, considers $25,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $20,000 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 Statement of Cash Flows—Indirect Method (partial) Last Year Rusco Company Comparative Balance Sheet at July 31 This Year Assets Current assets: Cash $ 20,000 Accounts Receivable 227,000 Inventory 254,500 Prepaid expenses 10.500 Total current assets 512,000 Long-term investments 105,000 Plant and equipment 870,000 Less accumulated depreciation 212,500 Net plant and equipment 657, 500 Total assets $1,274,500 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 235,500 Accrued liabilities 8.500 Income taxes payable 46,000 Total current liabilities 290,000 Bonds Payable 215,000 Total liabilities 505,000 Stockholders' equity: Common stock 642,500 Retained earnings 127,000 Total stockholders' equity 769,500 Total liabilities and stockholders' equity $1,274,500 $ 39,000 216,500 199,000 21,000 475,500 145,000 755,000 191,500 563, 500 $1,184,000 $ 176,000 16,000 41,500 233, 500 110,000 343,500 625,000 215,500 840, 500 $1,184,000 $ 0 Rusco Company Statement of Cash Flows For This Year Ended July 31 Rusco Company Income Statement For This Year Ended July 31 Sales Cost of goods old Grog margin Selling and administrative expenses Net operating income Nonoperating items: Gain on sale of investments $22,500 Loss on sale of equipment (7,000) Income before taxes Income taxes Net income $900,000 562,500 337,500 240,750 96,750 Operating activities: Investing activities: 15,500 112,250 33, 650 $ 78,600 The following additional information is available for this year. a. The company declared and paid a cash dividend. b. Equipment was sold during the year for $48,000. The equipment originally cost $100,000 and had accumulated depreciation of $45,000. c. Long-term investments that cost $40,000 were sold during the year for $62,500. d. The company did not retire any bonds payable or repurchase any of its common stock Financing activities: 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. Beginning cash and cash equivalents Ending cash and cash equivalents

Answer 1

	Rusco Company
	Cash Flow Statement
	For the Year Ended July 31st
	Cash Flows from Operating Activities
	Net Income			$          78,600.00
	Depreciation Expense(Calculated below)		$                            66,000.00
	Loss on Sale of Plant & Equipment		$                              7,000.00
	Gain on sale of Investment		$                         (22,500.00)
	Increase in Accounts Receivable($227000-$216500)		$                         (10,500.00)
	Increase in Inventories($254500-$199000)		$                         (55,500.00)
	Decrease in Prepaid Expenses($10500-$21000)		$                            10,500.00
	Increase in Accounts Payable(235500-$176000)		$                            59,500.00
	Decrease in Accrued liability($8500-$16000)		$                            (7,500.00)
	Increase in Income tax payable($46000-$41500)		$                              4,500.00	$          51,500.00
	Net Cash provided by operating activities=(A)			$      1,30,100.00
	Cash flows from Investing Activities
	Sale of Plant & Equipment		$                            48,000.00
	Purchase of equipment(Calculated below)		$                      (2,15,000.00)
	Sale of Investments		$                            62,500.00
	Net Cash provided by Investing Activities=(B)			$    (1,04,500.00)
	Cash Flow from financing activities
	Issuance of Bonds($215000-$110000)		$                        1,05,000.00
	Issuance of common stock($642500-$625000)		$                            17,500.00
	Dividend paid		$                      (1,67,100.00)
	Net Cash from financing activites=(C )			$        (44,600.00)
	Net Increase in cash=(A)+(B)+(C )			$        (19,000.00)
	Cash 1,July			$          39,000.00
	Cash 31st July			$          20,000.00
	Plant & Equipment
	Particular	Amt	Particular	Amt
	Beginning Balance	755000	By Bank	48000
	Bank Account (Assets Purchase)	215000	By loss on sale	7000
			By Depreciation	45000
			By Balance C/d	870000
	Total	970000	Total	970000
	Accumulated Depreciation
	Particular	Amt	Particular	Amt
	By Plant & Equipment	45000	By Balance B/d	191500
	By Balance C/d	212500	By Depreciation	66000
		257500	Total	257500
	Retained Earnings
	Particular	Amt	Particular	Amt
	To Dividend paid	167100	By Balance B/d	215500
	By Balance C/d	127000	By Net Income	78600
		294100	Total	294100