Question

Mary Walker, president of Rusco Company, considers $34,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $29,000 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	$	29,000		$	49,800
Accounts Receivable		239,600			228,200
Inventory		262,600			204,400
Prepaid expenses		16,800			31,800
Total current assets		548,000			514,200
Long-term investments		132,000			190,000
Plant and equipment		888,000			764,000
Less accumulated depreciation		217,000			194,200
Net plant and equipment		671,000			569,800
Total assets	$	1,351,000		$	1,274,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	245,400		$	177,800
Accrued liabilities		9,400			17,800
Income taxes payable		53,200			46,000
Total current liabilities		308,000			241,600
Bonds Payable		242,000			128,000
Total liabilities		550,000			369,600
Stockholders’ equity:
Common stock		710,000			670,000
Retained earnings		91,000			234,400
Total stockholders' equity		801,000			904,400
Total liabilities and stockholders' equity	$	1,351,000		$	1,274,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,080,000
Cost of goods sold						675,000
Gross margin						405,000
Selling and administrative expenses						288,900
Net operating income						116,100
Nonoperating items:
Gain on sale of investments	$	27,000
Loss on sale of equipment		(8,800	)			18,200
Income before taxes						134,300
Income taxes						40,220
Net income					$	94,080

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 $55,200. The equipment originally cost $118,000 and had accumulated depreciation of $54,000.
3. Long-term investments that cost $58,000 were sold during the year for $85,000.
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.

Answer 1

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Cash Flow
Net Income		$    94,080
Adjustment to Net income:
Depreciation Expenses		$    76,800
Loss on sale of Plant		$      8,800
Gain on Sale of Plant		$ -27,000
Increase in Receivable		$ -11,400
Increase in Inventory		$ -58,200
Decrease in Prepaid Expense		$    15,000
Increase in Accounts Payable		$    67,600
Decrease in Accrued Liabilities		$    -8,400
Increase in Income Tax payable		$      7,200
Net Cash flow from Operating Activities		$ 164,480
Cash flow from Investing activities:
Sale of Investment		$    85,000
Sale of Plant (Given)		$    55,200
Purchase of Plant in cash (Working-1)		$-242,000
Net Cash from Investing Activities		$-101,800
Cash flow from financing activities:
Issuance of Common Stock		$    40,000
Bond Payable issue		$ 114,000
Payment of Dividend Working -2		$-237,480
Net Cash from Financing Activities		$ -83,480
Net Increase in Cash		$ -20,800
Add: Beginning Balance		$    49,800
Ending Balance		$    29,000
Working 1
		Plant	Acc dep
Beginning Balance		$ 764,000	$ 194,200
Less: Sale		$-118,000	$ -54,000
		$ 646,000	$ 140,200
Less: Ending Balance		$-888,000	$-217,000
Purchase/Depreciation Expense		$-242,000	$ -76,800
Book Value $118,000-$54,000		$    64,000
Less: Sale Value		$ -55,200
Loss on Sale of Plant		$      8,800
Working 2
Beginning Balance Retained Earning		$ 234,400
Add: Net Income		$    94,080
Less: Ending Balance		$ -91,000
Payment of Dividend		$ 237,480
Free Cash Flow:
Net Cash flow from Operating Activities		$ 164,480
Less: Capital Expenditure		$-242,000
Less: Dividend		$-237,480
Free Cash Flow		$-315,000