Question

Mary Walker, president of Rusco Company, considers $37,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $32,000 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	$	32,000		$	53,400
Accounts receivable		243,800			232,100
Inventory		265,300			206,200
Prepaid expenses		18,900			35,400
Total current assets		560,000			527,100
Long-term investments		141,000			205,000
Plant and equipment		894,000			767,000
Less accumulated depreciation		218,500			195,100
Net plant and equipment		675,500			571,900
Total assets	$	1,376,500		$	1,304,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	248,700		$	178,400
Accrued liabilities		9,700			18,400
Income taxes payable		55,600			47,500
Total current liabilities		314,000			244,300
Bonds Payable		251,000			134,000
Total liabilities		565,000			378,300
Stockholders’ equity:
Common stock		732,500			685,000
Retained earnings		79,000			240,700
Total stockholders' equity		811,500			925,700
Total liabilities and stockholders' equity	$	1,376,500		$	1,304,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,140,000
Cost of goods sold						712,500
Gross margin						427,500
Selling and administrative expenses						304,950
Net operating income						122,550
Nonoperating items:
Gain on sale of investments	$	28,500
Loss on sale of equipment		(9,400	)			19,100
Income before taxes						141,650
Income taxes						42,410
Net income					$	99,240

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 $57,600. The equipment originally cost $124,000 and had accumulated depreciation of $57,000.
3. Long-term investments that cost $64,000 were sold during the year for $92,500.
4. 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.

Answer 1

1.

RUSCO COMPANY
Statement of Cash flows
For the Year Ended July 31
Cash flows from operating activities
Net Income		$        99,240
Adjustments to reconcile net income to ;
Depreciation expense	$     80,400		218500-195100+57000
Gain on sale of investment	$   (28,500)
Loss on sale of equipment	$        9,400
Increase in accounts receivable	$   (11,700)
Increase in inventory	$   (59,100)
Decrease in prepaid expenses	$     16,500
Increase in accounts payable	$     70,300
Decrease in accrued liabilities	$     (8,700)
Increase in income tax payable	$        8,100
		$        76,700
Net cash provided by operating activities		$     175,940

2.

RUSCO COMPANY
Statement of Cash flows
For the Year Ended July 31
Cash flows from operating activities
Net Income		$        99,240
Adjustments to reconcile net income to ;
Depreciation expense	$     80,400		218500-195100+57000
Gain on sale of investment	$   (28,500)
Loss on sale of equipment	$        9,400
Increase in accounts receivable	$   (11,700)
Increase in inventory	$   (59,100)
Decrease in prepaid expenses	$     16,500
Increase in accounts payable	$     70,300
Decrease in accrued liabilities	$     (8,700)
Increase in income tax payable	$        8,100
		$        76,700
Net cash provided by operating activities		$     175,940
Cash flows from investing activities
Cash paid for purchase of Equipment	$ (251,000)		767000-894000-124000
Cash received from sale of equipment	$     57,600
Cash received from sale investments	$     92,500
Net cash used by investing activities		$   (100,900)
Cash flows from financing activities
Dividend payments	$ (260,940)		79000-240700-99240
Cash received from issue of bonds	$   117,000
Cash received from issue of common stock	$     47,500
Net cash used by financing activities		$     (96,440)
Net Decrease in cash and cash equivalents		$     (21,400)
Cash and cash equivalents at beginning of period		$        53,400
Cash and cash equivalents at end of period		$        32,000

3.

Net cash provided by operating activities	$   175,940
Less: Capital expenditure	$ (251,000)
Less: Dividends paid	$ (260,940)
Free cash flow	$ (336,000)

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