Question

Mary Walker, president of Rusco Company, considers $41,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $36,000 in cash was available at the end of 2015. 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 July 31, 2015 and 2014
	2015		2014
Assets
Current assets:
Cash	$	36,000	$	58,200
Accounts Receivable		225,200		237,300
Inventory		268,900		208,600
Prepaid expenses		21,700		40,200
Total current assets		551,800		544,300
Long-term investments		153,000		225,000
Plant and equipment		902,000		771,000
Less accumulated depreciation		220,500		196,300
Net plant and equipment		681,500		574,700
Total assets	$	1,386,300	$	1,344,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	193,900	$	253,100
Accrued liabilities		10,100		19,200
Income taxes payable		58,800		49,500
Total current liabilities		262,800		321,800
Bonds Payable		263,000		0
Total liabilities		525,800		321,800
Stockholders’ equity:
Common stock		735,000		705,000
Retained earnings		125,500		317,200
Total stockholders' equity		860,500		1,022,200
Total liabilities and stockholders' equity	$	1,386,300	$	1,344,000

Rusco Company Income Statement For the Year Ended July 31, 2015
Sales		$	1,220,000
Cost of goods sold			762,500
Gross margin			457,500
Selling and administrative expenses			326,350
Net operating income			131,150
Nonoperating items:
Gain on sale of investments	$30,500
Loss on sale of equipment	(10,200)		20,300
Income before taxes			151,450
Income taxes			45,330
Net income		$	106,120

The following additional information is available for the year 2015.

a.	The company declared and paid a cash dividend.
b.	Equipment was sold during the year for $60,800. The equipment had originally cost $132,000 and had accumulated depreciation of $61,000.
c.	Long-term investments that had cost $72,000 were sold during the year for $102,500.
d.	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 operating activities for 2015. (Negative amount should be indicated by a minus sign.)

2.	Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for 2015. (List any deduction in cash and cash outflows as negative amounts.)

  

3.	Compute free cash flow for 2015. (Negative amount should be indicated by a minus sign.)

Answer 1

1.

Rusco Company
Cash Flow Statement
For the year ended July 31, 2015
Cash flows from operating activities
Net Income		$ 106,120
Adjustment to reconcile net income to:
Depreciation expense	$   85,200		220500-196300+61000
Gain on sale of investment	$ (30,500)
Loss on sale of equipment	$   10,200
Decrease in accounts receivable	$   12,100		237300-225200
Increase in inventory	$ (60,300)		208600-268900
Decrease in prepaid expenses	$   18,500		40200-21700
Decrease in accounts payable	$ (59,200)		193900-253100
Decrease in accrued payable	$   (9,100)		10100-19200
Increase in Incometax payable	$      9,300		58800-49500
		$ (23,800)
Net cash flow from operating activities		$    82,320

2.

Rusco Company
Cash Flow Statement
For the year ended July 31, 2015
Cash flows from operating activities
Net Income		$ 106,120
Adjustment to reconcile net income to:
Depreciation expense	$      85,200		220500-196300+61000
Gain on sale of investment	$   (30,500)
Loss on sale of equipment	$      10,200
Decrease in accounts receivable	$      12,100		237300-225200
Increase in inventory	$   (60,300)		208600-268900
Decrease in prepaid expenses	$      18,500		40200-21700
Decrease in accounts payable	$   (59,200)		193900-253100
Decrease in accrued payable	$      (9,100)		10100-19200
Increase in Incometax payable	$        9,300		58800-49500
		$ (23,800)
Net cash flow from operating activities		$    82,320
Cash flows from investing activities
Cash received from sale of equipment	$      60,800
Cash received from sale of investments	$   102,500
Cash paid for Purchase of equipment	$ (263,000)		771000-902000-132000
Net cash used for investing activities		$ (99,700)
Cash flows from financing activities
Cash received from issuance of common stock	$      30,000		735000-705000
Cash paid for dividend	$ (297,820)		125500-317200-106120
Cash from issue of bonds	$   263,000
Net cash flow from financing activities		$    (4,820)
Net increase in cash and cash equivalents		$ (22,200)
Cash and cash equivalents at beginning of period		$    58,200
Cash and cash equivalents at end of period		$    36,000

3.

Net cash flow from operating activities	$      82,320
Less: Capital expenditure	$ (263,000)
Less: Dividend	$ (297,820)
Free cash flow	$ (478,500)