Question
Mary Walker, president of Rusco Company, considers $30,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements,
Mary Walker, president of Rusco Company, considers $30,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $25,000in cash was available at the end of 2014. 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, 2014 and 2013 | ||||
2014 | 2013 | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 25,000 | $ | 45,000 |
Accounts Receivable | 212,000 | 223,000 | ||
Inventory | 259,000 | 202,000 | ||
Prepaid expenses | 14,000 | 27,000 | ||
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Total current assets | 510,000 | 497,000 | ||
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Long-term investments | 120,000 | 170,000 | ||
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Plant and equipment | 880,000 | 760,000 | ||
Less accumulated depreciation | 215,000 | 193,000 | ||
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Net plant and equipment | 665,000 | 567,000 | ||
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Total assets | $ | 1,295,000 | $ | 1,234,000 |
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Liabilities and Stockholders' Equity | ||||
Current liabilities: | ||||
Accounts payable | $ | 184,000 | $ | 241,000 |
Accrued liabilities | 9,000 | 17,000 | ||
Income taxes payable | 50,000 | 44,000 | ||
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Total current liabilities | 243,000 | 302,000 | ||
Bonds Payable | 230,000 | 120,000 | ||
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Total liabilities | 473,000 | 422,000 | ||
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Stockholders equity: | ||||
Common stock | 620,000 | 650,000 | ||
Retained earnings | 202,000 | 162,000 | ||
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Total stockholders' equity | 822,000 | 812,000 | ||
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Total liabilities and stockholders' equity | $ | 1,295,000 | $ | 1,234,000 |
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Rusco Company Income Statement For the Year Ended July 31, 2014 | |||
Sales | $ | 1,000,000 | |
Cost of goods sold | 625,000 | ||
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Gross margin | 375,000 | ||
Selling and administrative expenses | 267,500 | ||
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Net operating income | 107,500 | ||
Nonoperating items: | |||
Gain on sale of investments | $25,000 | ||
Loss on sale of equipment | (8,000) | 17,000 | |
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Income before taxes | 124,500 | ||
Income taxes | 37,300 | ||
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Net income | $ | 87,200 | |
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The following additional information is available for the year 2014. |
a. | The company declared and paid a cash dividend. |
b. | Equipment was sold during the year for $52,000. The equipment had originally cost $110,000 and had accumulated depreciation of $50,000. |
c. | Long-term investments that had cost $50,000 were sold during the year for $75,000. |
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 for operating activities for 2014. (Negative amount should be indicated by a minus sign.) |
2. | Prepare a statement of cash flows for 2014. (List any deduction in cash and cash outflows as negative amounts.) |
3. | Compute free cash flow for 2014. (Negative amount should be indicated by a minus sign.) |
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