Mary Walker, president of Rusco Company, considers $21,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $16,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. Rusco CompanyComparative Balance Sheetat July 31 This YearLast YearAssets Current assets: Cash$ 16,000$ 34,200Accounts Receivable221,400211,300Inventory250,900196,600Prepaid expenses7,70016,200Total current assets496,000458,300Long-term investments93,000125,000Plant and equipment862,000751,000Less accumulated depreciation210,500190,300Net plant and equipment651,500560,700Total assets$ 1,240,500$ 1,144,000Liabilities and Stockholders' Equity Current liabilities: Accounts payable$ 231,100$ 175,200Accrued liabilities8,10015,200Income taxes payable42,80039,500Total current liabilities282,000229,900Bonds Payable203,000102,000Total liabilities485,000331,900Stockholders’ equity: Common stock612,500605,000Retained earnings143,000207,100Total stockholders' equity755,500812,100Total liabilities and stockholders' equity$ 1,240,500$ 1,144,000 Rusco CompanyIncome StatementFor This Year Ended July 31Sales $ 820,000Cost of goods sold 512,500Gross margin 307,500Selling and administrative expenses 219,350Net operating income 88,150Nonoperating items: Gain on sale of investments$ 20,500 Loss on sale of equipment(6,200)14,300Income before taxes 102,450Income taxes 30,730Net income $ 71,720 The following additional information is available for this year. The company declared and paid a cash dividend.Equipment was sold during the year for $44,800. The equipment originally cost $92,000 and had accumulated depreciation of $41,000.Long-term investments that cost $32,000 were sold during the year for $52,500.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.

The operating activity of the business is concerned with manufacturing and selling of goods and…

Answered: Mary Walker, president of Rusco…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter14: Statement Of Cash Flows

Section: Chapter Questions

Problem 43E

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Question

Mary Walker, president of Rusco Company, considers $21,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $16,000 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.

	This Year	Last Year
Rusco Company Comparative Balance Sheet at July 31
Assets
Current assets:
Cash	$ 16,000	$ 34,200
Accounts Receivable	221,400	211,300
Inventory	250,900	196,600
Prepaid expenses	7,700	16,200
Total current assets	496,000	458,300
Long-term investments	93,000	125,000
Plant and equipment	862,000	751,000
Less accumulated depreciation	210,500	190,300
Net plant and equipment	651,500	560,700
Total assets	$ 1,240,500	$ 1,144,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$ 231,100	$ 175,200
Accrued liabilities	8,100	15,200
Income taxes payable	42,800	39,500
Total current liabilities	282,000	229,900
Bonds Payable	203,000	102,000
Total liabilities	485,000	331,900
Stockholders’ equity:
Common stock	612,500	605,000
Retained earnings	143,000	207,100
Total stockholders' equity	755,500	812,100
Total liabilities and stockholders' equity	$ 1,240,500	$ 1,144,000

Rusco Company Income Statement For This Year Ended July 31
Sales		$ 820,000
Cost of goods sold		512,500
Gross margin		307,500
Selling and administrative expenses		219,350
Net operating income		88,150
Nonoperating items:
Gain on sale of investments	$ 20,500
Loss on sale of equipment	(6,200)	14,300
Income before taxes		102,450
Income taxes		30,730
Net income		$ 71,720

The following additional information is available for this year.

The company declared and paid a cash dividend.
Equipment was sold during the year for $44,800. The equipment originally cost $92,000 and had accumulated depreciation of $41,000.
Long-term investments that cost $32,000 were sold during the year for $52,500.
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.

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