Question

A comparative balance sheet and an income statement for Rowan Company are given below: Rowan Company Comparative Balance Sheet (dollars in millions) Ending Balance Beginning Balance Assets Current assets: Cash and cash equivalents $ 70 $ 91 Accounts receivable 536 572 Inventory 620 580 Total current assets 1,226 1,243 Property, plant, and equipment 1,719 1,656 Less accumulated depreciation 640 480 Net property, plant, and equipment 1,079 1,176 Total assets $ 2,305 $ 2,419 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 205 $ 180 Accrued liabilities 94 105 Income taxes payable 72 88 Total current liabilities 371 373 Bonds payable 180 310 Total liabilities 551 683 Stockholders' equity: Common stock 800 800 Retained earnings 954 936 Total stockholders' equity 1,754 1,736 Total liabilities and stockholders' equity $ 2,305 $ 2,419 Rowan Company Income Statement For the Year Ended December 31 (dollars in millions) Sales $ 4,350 Cost of goods sold 3,470 Gross margin 880 Selling and administrative expenses 820 Net operating income 60 Nonoperating items: Gain on sale of equipment 4 Income before taxes 64 Income taxes 22 Net income $ 42 Rowan also provided the following information: The company sold equipment that had an original cost of $16 million and accumulated depreciation of $9 million. The cash proceeds from the sale were $11 million. The gain on the sale was $4 million. The company did not issue any new bonds during the year. The company paid a cash dividend during the year. The company did not complete any common stock transactions during the year. Required: 1. Using the indirect method, prepare a statement of cash flows for the year. 2. Calculate the free cash flow for the year. 3. To help Rowan assess its liquidity at the end of the year, calculate the following: a. Current ratio b. Acid-test (quick) ratio 4. To help Rowan assess its asset management, calculate the following: a. Average collection period (assuming all sales are on account) b. Average sale period

Answer 1

Cash flow of OA:			Acc Dep:
ni	42		9	480
gain on sale	-4		640	169
dep	169		649	649
add:lower Ar	36
less: higher inven	-40		Ret earning:
add: higher AP	25		24	936
LESS:lower AL	-11		954	42
less: lower ITP	-16		978	978
Inflow of OA	201		Fixed Asets:
			1656	16
Cash flow of IA:			79	1719
purchase of plant	-79		1735	1735
sale of equip	11
outflow of IA	-68
Cash flow of FA:
payment of bonds	-130
dividend paid	-24
outflow of FA:	-154
total outflow	-21
Op bal	91
Cl bal	70