PROBLEM 14-14 Prepare and Interpret a Statement of Cash Flows; Free Cash Flow (LOI, LO2, L03) Sharon Feldman, president of Allied Company, considers $20,000 to be a minimum cash balance for operating purposes. As can be seen from the following statements, only $15,000 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 puzzling to Ms. Feldman. Allled Company Comparative Balance Sheet December 31, 2011, and 2010 2011 2010 $ 15,000 $ 33,000 200,000 210,000 250,000 196,000 7,000 15,000 472,000 454,000 90,000 120,000 860,000 750,000 210,000 190,000 650,000 560,000 $1,212,000 $1,134,000 Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Long-term investments Plant and equipment Less accumulated depreciation Net plant and equipment Total assets... Liabilities and Stockholders' Equity Current liabilities: Accounts payable Accrued liabilities Income taxes payable Total current liabilities. Bonds payable Total liabilities Stockholders' equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 175,000 $ 230,000 8,000 15,000 42,000 39,000 225,000 284,000 200,000 100,000 425,000 384,000 595,000 600,000 192,000 150,000 787,000 750,000 $1,212,000 $1,134,000 Allied Company Income Statement For the Year Ended December 31, 2011 Sales. Cost of goods sold Gross margin. Selling and administrative expenses Net operating income Nonoperating items: Gain on sale of investments $20,000 Loss on sale of equipment (6.000) Income before taxes. Income taxes $800,000 500,000 300,000 214,000 86,000 14,000 100,000 20.000 The following additional information is available for the year 2011: The company sold long-term investments with an original cost of $30,000 for $50,000 during a. the year. C. b. Equipment that had cost $90,000 and on which there was $40,000 in accumulated deprecia- tion was sold during the year for $44,000. 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. The company did not retire any bonds during the year. Required: 1. Using the indirect method, compute the net cash provided by operating activities for 2011, 2. Prepare a statement of cash flows for 2011 3. Compute free cash flow for 2011. 4. Explain the major reasons for the decline in the company's cash balance. e
