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	$	37,000		$	59,400
Accounts Receivable		250,800			238,600
Inventory		269,800			209,200
Prepaid expenses		22,400			41,400
Total current assets		580,000			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	$	1,419,000		$	1,354,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	254,200		$	179,400
Accrued liabilities		10,200			19,400
Income taxes payable		59,600			50,000
Total current liabilities		324,000			248,800
Bonds Payable		266,000			144,000
Total liabilities		590,000			392,800
Stockholders’ equity:
Common stock		770,000			710,000
Retained earnings		59,000			251,200
Total stockholders' equity		829,000			961,200
Total liabilities and stockholders' equity	$	1,419,000		$	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.

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.

Using the indirect method, compute the net cash provided by/used in operating activities for this year. (List any deduction in cash and cash outflows as negative amounts.) Rusco Company Statement of Cash Flows-Indirect Method (partial)

Answer 1

1
Net cash for operating activities	$       45,440
Working for the answer
Cash Flow statement
Cash flows from operating activities
Net income		$ 107,840
Adjustment to reconcile net income
non cash expenses - Depreciation	$       86,400
Non operating gains	$     -31,000
non operating losses	$       10,400
Increase in accounts receivable	$     -12,200
Increase in inventory	$     -60,600
Decrease in prepaid Expanses	$       19,000
Decrease in accounts payable	$     -74,800
Decrease in accrued liabilities	$       -9,200
Increase in income taxes payable	$         9,600	$   -62,400
Net cash for operating activities		$    45,440
2
Cash Flow statement
Cash flows from operating activities
Net income		$ 107,840
Adjustment to reconcile net income
non cash expenses - Depreciation	$       86,400
Non operating gains	$     -31,000
non operating losses	$       10,400
Increase in accounts receivable	$     -12,200
Increase in inventory	$     -60,600
Decrease in prepaid Expases	$       19,000
Decrease in accounts payable	$     -74,800
Decrease in accrued liabilities	$       -9,200
Increase in income taxes payable	$         9,600	$   -62,400
Net cash for operating activities		$    45,440
2) Investing activites
Addittions to equipment	$   -266,000
proceeds from sale of equipment	$       61,600
proceeds from sale of investment	$     105,000
Cash flow from Investing activity		$   -99,400
3) financing acivities
increase in bonds payable	$     122,000
Common stock decrease	$       60,000
Cash dividend paid	$   -150,440
Decrease in cash from financing activities		$    31,560
Net decrease in cash and cash eqivalents		$   -22,400
Cash at the beginning of the yr		$    59,400
cash at the end of the yr		$    37,000
3
Net cash provided by operating activities		$    45,440
Capital expenditures	$   -266,000
Dividends	$   -150,440	$ -416,440
Free cash flow		$ -371,000