Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 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

Income Statement

For This Year Ended July 31  

The following additional information is available for this year.

a. The company declared and paid a cash dividend.

b. Equipment was sold during the year for $8,000. The equipment originally cost $20,000 and had accumulated depreciation of $10,000.

c. Long-term investments that cost $20,000 were sold during the year for $30,000.

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 this year.

2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for this year.

3. Compute free cash flow for this year.

4. Explain the major reasons for the decline in the company’s cash balance.

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Rusco Company Comparative Balance Sheet at July 31 This Year Last Year Assets Current assets: Cash and cash equivalents. $ 8,000 $ 21,000 ... Accounts recelvable 120,000 80,000 Inventory ... Prepaid expenses 140,000 90,000 5,000 9,000 Total current assets 273,000 50,000 200,000 Long-term investments 70,000 Plant and equipment ... 430,000 300,000 Less accumulated depreclation 60,000 50,000 Net plant and equipment 370,000 250,000 Total assets $693,000 $520,000 Liabilitles and Stockholders' Equlty Current liabilities: Accounts payable... $123,000 $ 60,000 Accrued liabilities . 8,000 20,000 17,000 12,000 Income taxes payable Total current liabilities 151,000 89,000 Bonds payable 70,000 221,000 Total llabilitles 89,000 Stockholders' equity: Common stock 366,000 346,000 Retalned earnings 106,000 85,000 Total stockholders' equity ...... 472,000 431,000 Total liabilitles and stockholders' equity. $693,000 $520,000