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 and cash equivalents	$	37,000		$	59,400
Accounts receivable		226,400			238,600
Inventory		269,800			209,200
Prepaid expenses		22,400			41,400
Total current assets		555,600			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	$	1,394,600		$	1,354,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	194,800		$	254,200
Accrued liabilities		10,200			19,400
Income taxes payable		59,600			50,000
Total current liabilities		264,600			323,600
Bonds payable		266,000			124,000
Total liabilities		530,600			447,600
Stockholders’ equity:
Common stock		744,400			710,000
Retained earnings		119,600			196,400
Total stockholders' equity		864,000			906,400
Total liabilities and stockholders' equity	$	1,394,600		$	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.

1. The company declared and paid a cash dividend.

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

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

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

Rusco Company Direct Method of Determining the Net Cash Flows from Operating Activitites Sales $1,240,000 Adjustments to a cash basis: Decrease in Accounts receivable $12,200 $1,252,200 [Decrease in Accounts Receivable = $238,600 - $226,400 = $12,200] $775,000 Cost of Goods Sold Adjustments to a cash basis: Increase in Inventory Decrease in Accounts payable $60,600 $59,400 [Increase in Inventory = $269,800 - $209,200 = $60,600] [Decrease in Accounts Payable = $254,200 - $194,800 = $59,400] $895,000 -$331,700 Selling & Administrative Expenses Adjustments to a cash basis: Depreciation Expense included Decrease in Prepaid expenses Decrease in Accrued liabilities $86,400 $19,000 $9,200 [Dep. Expes. = $221,000 + $$62,000 - $196,600 = $86,400] [Decrease in Prepaid exps. = $41,400 - $22,400 = $19,000] [Decrease in Accrued Liab. = $ 19,400 - $10,200 = $9,200) $235,500 -$46,060 Income Taxes Adjustments to a cash basis: Increase in Income taxes payable Net Cash Flows from Operating Activities $9,600 [Increase in IT payable = $59,600 - $50,000 = $9,600] $36,460 $85,240

Rusco Company Statement of Cash Flows For This Year Ended July 31 Cash flow from operating activities: Net cash flow from operating activities $85,240 [Ref: Part-1] Cash flow from investing activities: Cash received from selling equipment Cash received from selling investments Cash paid to purchase new equipments Net cash flow from investing activities $61,600 $105,000 $266,000 ($904,000 + $134,000 - $772,000] $99,400 $34,400 $142,000 $184,640 Cash flow from financing activities: Cash received from issuing common stock Cash received from issuing bonds Cash dividends paid Net cash flow from financing activities Net decrease in cash balance during the year Cash balance at beginning of period Cash balance at end of period [Increase in Common Stock = $744,400 - $710,000 = $34,400] [Increase in Bonds payable = $266,000 - $124,000 = $142,000] [Cash dividends paid =$196,400 + $107,840 - $119,600 = $184,640] $8,240 -$22,400 [$85240 - $99400 + -$8240] $59,400 $37,000 [-$22400 + $59400]