Question

Mary Walker, president of Rusco Company, considers $22,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $17,000 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	$	17,000		$	35,400
Accounts receivable		202,400			212,600
Inventory		251,800			197,200
Prepaid expenses		8,400			17,400
Total current assets		479,600			462,600
Long-term investments		96,000			130,000
Plant and equipment		864,000			752,000
Less accumulated depreciation		211,000			190,600
Net plant and equipment		653,000			561,400
Total assets	$	1,228,600		$	1,154,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	176,800		$	232,200
Accrued liabilities		8,200			15,400
Income taxes payable		43,600			40,000
Total current liabilities		228,600			287,600
Bonds payable		206,000			104,000
Total liabilities		434,600			391,600
Stockholders’ equity:
Common stock		642,300			610,000
Retained earnings		151,700			152,400
Total stockholders' equity		794,000			762,400
Total liabilities and stockholders' equity	$	1,228,600		$	1,154,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	840,000
Cost of goods sold						525,000
Gross margin						315,000
Selling and administrative expenses						224,700
Net operating income						90,300
Nonoperating items:
Gain on sale of investments	$	21,000
Loss on sale of equipment		(6,400	)			14,600
Income before taxes						104,900
Income taxes						31,460
Net income					$	73,440

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 $45,600. The equipment originally cost $94,000 and had accumulated depreciation of $42,000.

3. Long-term investments that cost $34,000 were sold during the year for $55,000.

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.

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Using the direct method, adjust the company’s income statement for this year to a cash basis. (Adjustment amounts that are to be deducted should be indicated with a minus sign.)

	Rusco Company Direct Method of Determining the Net Cash Flows from Operating Activities Adjustments to a cash basis: Adjustments to a cash basis: Selling and administrative expenses Adjustments to a cash basis: Income taxes Adjustments to a cash basis:

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for this year. (Cash outflows and amounts to be deducted should be indicated with a minus sign.)

	Rusco Company Statement of Cash Flows For This Year Ended July 31 Operating activities: Cash received from customers Less cash disbursements for: Total cash disbursements 0 0 Investing activities: 0 Financing activities: 0 0 Beginning cash and cash equivalents Ending cash and cash equivalents

Answer 1

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Naming covention is not available, can be slightly different: Solution: Amount ($) 1) Note: Ignore the blank unused lines: Particulars Sales Adjustment to a cash basis: Add: Decrease in Accounts Receivable 2) Note:Ignore the blank unused rows. Cash flow Statement - Direct Method 840000 $ 10,200 Amount ($) 850200 525000 850200 Cost of goods sold Adjustment to a cash basis: Add: Decrease in Accounts payable Add: Increase in Inventory $ $ 55,400 54,600 635000 160500 27,860 635000 Particulars Cash flow from Operating Activities: Cash received from customers Less: Cash disbursement for: Cost of Merchandise purchased Selling and admin. Expenses Income taxes Total Cash Disbursements Net Cash provided by Operating Activities (A) Investing Activities: Proceed from Sale of Equipment Proceed from Sale of Long term investments Addition to plant and Equipment (864000) - (752000-94000) Net Cash used for Investing Activities (B) 823360 $ 26,840 Selling and admin. Expenses 224700 Adjustment to a cash basis: Les: Depreciation (211000) - (190600-42000) $ -62,400 Less: Decrease in Prepaid expenses $ 9,000 Add: Decrease in Accrued liabilities $ 7,200 45600 55000 -206000 160500 $ 31,460 -105400 Income tax Expense Adjustment to a cash basis: Less: Increase in Income tax Payable -3600 $ $ $ 27,860 26,840 Net Cash flow from Operating activities 32,300 102000 -74140 Cash Flow from Financing Activities: Issuance of Common stock Issuance of Bonds Payable Cash Dividend paid (151700)-(152400+73440) Net Cash used for Financing Activities -C) Net Decrease in Cash (A+B+C) Beginning Cash and cash equivalents Ending Cash and cash equivalents $ 60,160 $-18,400 $ 35,400 $ 17,000