Problem 12-13B Prepare and Interpret a Statement of Cash Flows; Free Cash Flow [LO12-1, LO12-2, LO12-3) Cheryl Wilson, president of Rivers Company, considers $25,000 to be a minimum cash balance for operating purposes. As can be seen from the following statements, only $20,000 in cash was available at the end of 2011. Because the company reported a large net income for the year, and also issued bonds and sold some long-term investments, the sharp decline in cash is puzzing to Ms. Wison Rivers Company Comparative Balance Sheet December 31, 2011, and 2010 2011 2010 Assets Current assets: Cash $ 20,000 $ 39,000 Accounts Receivable 206,000 216,500 Inventory 254,500 199,000 Prepaid expenses 10,500 21,000 Total current assets 491,000 475,500 Long-term investments 105,000 145,000 Plant and equipment Loss accumulated depreciation 870,000 212,500 755,000 191,500 Net plant and equipment 657,500 563,500 Totalssels $1,263,500 $1,184,000 Liabilities and Stockholders' equity Current liabilities: Accounts payable Accrued liabilities Income taxes payable $ 179,500 236,500 8,500 16,000 46,000 41,500 Total current liabilities Bonds Payable 234,000 215,000 293,000 110,000 Total liabilities 449,000 403,000 Stockholders' equity Common stock Retained earnings 607,500 197,000 625,000 156,000 Total stockholders' equity 804,500 781,000 Total abilities and stockholders' equity $1,253,500 $1,184,000 Rivers Company Income Statement For the Year Ended December 31, 2011 Sales Cost of goods sold $900,000 562.500 Rivers Company Income Statement For the Year Ended December 31, 2011 Sales Cost of goods sold $900,000 562.500 Gross margin Selling and administrative expenses 337,500 240.750 96.750 Net operating income Non operating items: Gain on sale of investments Loss on sale of equipment $22,500 (7.000) 15.500 Income before taxes Income taxes 112.250 33.650 Not income $ 78,500 The following additional information is available for the year 2011 a. The company solid long-term investments with an orginal cost of $40,000 for $62,500 during the year. b. Equipment that had cost $100,000 and on which there was 345,000 in accumulated depreciation was sold during the year for $48.000 c. The company declared and paid a cash dividend during the year d. The stock of a dissident stockholder was repurchased for cash and retired during the year. No issues of stock were made 6. The company did not retire any bonds during the year. Required: 1. Using the indirect method determine the net cash provided by used by operating activities for 2011, (a Net cash operating activities 2. Prepare a statement of cash flows for 2011. (Amounts to be deducted and negative amounts should be indicated with a minus sign) Rivers Company Statement of Cash Flows - Indirect Method For the Year Ended December 31, 2011 Operating activities 2. Prepare a statement of cash flows for 2011. (Amounts to be deducted and negative amounts should be indicated with a minus sign.) Rivers Company Statement of Cash Flows - Indirect Method For the Year Ended December 31, 2011 Operating activities: Net income $ 78.800 Adjustments to convert net income to cash basis: Decrease in prepaid expenses $ 10,500 Increase in accounts receivable 10,500 Decrease in inventory (55,500) Decrease in accounts payable (56,000) Decrease in accrued liabilities (7.500) Increase in income taxes payable 4,500 Depreciation 66,000 Loss on sale of equipment 7,000 Gain on sale of investments (22.500) (43,000) 35,600 Investing activities: Proceeds from sale of long-term investments 62,500 Proceeds from sale of equipment 48.000 Additions to plant and equipment (215,000) (104.500) Financing activities: Cash dividonds Increase in common stock Issuance of bonds payable (37,600) (17,500) 105,000 Net cash provided by financing activities Net decrease in cash Cash balance, beginning of year Cash balance, and of year 49.900 (19.000) 39.000 $ 20,000 3. Compute free cash flow for 2011. (Negative amount should be indicated by a minus sign) Free cash flow