Question

Problem 12-13A Prepare and Interpret a Statement of Cash Flows; Free Cash Flow [LO12-1, LO12-2, LO12-3]

Mary Walker, president of Rusco Company, considers $27,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $22,000 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

$

22,000   

$

41,400   

     Accounts Receivable

208,400   

219,100   

     Inventory

256,300   

200,200   

     Prepaid expenses

11,900   

23,400   

Total current assets

498,600   

484,100   

Long-term investments

111,000   

155,000   

Plant and equipment

874,000   

757,000   

Less accumulated depreciation

213,500   

192,100   

Net plant and equipment

660,500   

564,900   

Total assets

$

1,270,100   

$

1,204,000   

Liabilities and Stockholders' Equity

  Current liabilities:

     Accounts payable

$

181,300   

$

237,700   

     Accrued liabilities

8,700   

16,400   

  Income taxes payable

47,600   

42,500   

  Total current liabilities

237,600   

296,600   

  Bonds Payable

221,000   

0   

  Total liabilities

458,600   

296,600   

  Stockholders’ equity:

     Common stock

662,000   

635,000   

     Retained earnings

149,500   

272,400   

  Total stockholders' equity

811,500   

907,400   

  Total liabilities and stockholders' equity

$

1,270,100   

$

1,204,000   

Rusco Company Income Statement For the Year Ended July 31, 2015
Sales		$	940,000
Cost of goods sold			587,500
Gross margin			352,500
Selling and administrative expenses			251,450
Net operating income			101,050
Nonoperating items:
Gain on sale of investments	$23,500
Loss on sale of equipment	(7,400)		16,100
Income before taxes			117,150
Income taxes			35,110
Net income		$	82,040

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 $49,600. The equipment had originally cost $104,000 and had accumulated depreciation of $47,000.
c.	Long-term investments that had cost $44,000 were sold during the year for $67,500.
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.)

Net cash provided by operating activities

$41,440

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.)

Rusco Company
Statement of Cash Flows - Indirect Method
For the Year Ended July 31, 2015
Operating activities:
Net income
Adjustments to convert net income to cash basis:
Depreciation
Decrease in accrued liabilities
Increase in income taxes payable
Gain on sale of investments
Loss on sale of equipment
		0
Net cash provided by operating activities		0
Investing activities:
Proceeds from sale of long-term investments
Proceeds from sale of equipment
Additions to plant and equipment
Net cash used in investing activities		0
Financing activities:
Issuance of bonds payable
Cash dividends
Net cash provided by financing activities		0
Net decrease in cash		0
Beginning cash and cash equivalents
Ending cash and cash equivalents		$0

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

Free cash flow

Answer 1

1)

Rusco Company
Cash Flow Statement
For the year ended July 31, 2015
Cash flows from operating activities
Net Income		$      82,040
Adjustment to reconcile net income to:
Depreciation expense	$      68,400		213500-192100+47000
Gain on sale of investment	$   (23,500)
Loss on sale of equipment	$        7,400
Decrease in accounts receivable	$      10,700		219100-208400
Increase in inventory	$   (56,100)		200200-256300
Decrease in prepaid expenses	$      11,500		23400-11900
Decrease in accounts payable	$   (56,400)		181300-237700
Decrease in accrued payable	$      (7,700)		8700-16400
Increase in Incometax payable	$        5,100		47600-42500
		$   (40,600)
Net cash flow from operating activities		$      41,440

2)

Rusco Company
Cash Flow Statement
For the year ended July 31, 2015
Cash flows from operating activities
Net Income		$      82,040
Adjustment to reconcile net income to:
Depreciation expense	$      68,400		213500-192100+47000
Gain on sale of investment	$   (23,500)
Loss on sale of equipment	$        7,400
Decrease in accounts receivable	$      10,700		219100-208400
Increase in inventory	$   (56,100)		200200-256300
Decrease in prepaid expenses	$      11,500		23400-11900
Decrease in accounts payable	$   (56,400)		181300-237700
Decrease in accrued payable	$      (7,700)		8700-16400
Increase in Incometax payable	$        5,100		47600-42500
		$   (40,600)
Net cash flow from operating activities		$      41,440
Cash flows from investing activities
Cash received from sale of equipment	$      49,600
Cash received from sale of investments	$      67,500
Cash paid for Purchase of equipment	$ (221,000)		757000-874000-104000
Net cash used for investing activities		$ (103,900)
Cash flows from financing activities
Cash received from issuance of common stock	$      27,000		662000-635000
Cash paid for dividend	$ (204,940)		149500-272400-82040
Cash from issue of bonds	$   221,000
Net cash flow from financing activities		$      43,060
Net increase in cash and cash equivalents		$   (19,400)
Cash and cash equivalents at beginning of period		$      41,400
Cash and cash equivalents at end of period		$      22,000

3)

Net cash flow from operating activities	$      41,440
Less: Capital expenditure	$ (221,000)
Less: Dividend	$ (204,940)
Free cash flow	$ (384,500)