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 Comparative Balance Sheet at July 31 |
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| This Year | Last Year | ||||
| Assets | |||||
| Current assets: | |||||
| Cash | $ | 8,000 | $ | 21,000 | |
| Accounts receivable | 120,000 | 80,000 | |||
| Inventory | 140,000 | 90,000 | |||
| Prepaid expenses | 5,000 | 9,000 | |||
| Total current assets | 273,000 | 200,000 | |||
| Long-term investments | 50,000 | 70,000 | |||
| Plant and equipment | 430,000 | 300,000 | |||
| Less accumulated depreciation | 60,000 | 50,000 | |||
| Net plant and equipment | 370,000 | 250,000 | |||
| Total assets | $ | 693,000 | $ | 520,000 | |
| Liabilities and Stockholders’ Equity | |||||
| Current liabilities: | |||||
| Accounts payable | $ | 123,000 | $ | 60,000 | |
| Accrued liabilities | 8,000 | 17,000 | |||
| Income taxes payable | 20,000 | 12,000 | |||
| Total current liabilities | 151,000 | 89,000 | |||
| Bonds payable | 70,000 | 0 | |||
| Total liabilities | 221,000 | 89,000 | |||
| Stockholders’ equity: | |||||
| Common stock | 366,000 | 346,000 | |||
| Retained earnings | 106,000 | 85,000 | |||
| Total stockholders’ equity | 472,000 | 431,000 | |||
| Total liabilities and stockholders’ equity | $ | 693,000 | $ | 520,000 | |
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| Rusco Company Income Statement For This Year Ended July 31 |
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| Sales | $ | 500,000 | ||||
| Cost of goods sold | 300,000 | |||||
| Gross margin | 200,000 | |||||
| Selling and administrative expenses | 158,000 | |||||
| Net operating income | 42,000 | |||||
| Nonoperating items: | ||||||
| Gain on sale of investments | $ | 10,000 | ||||
| Loss on sale of equipment | (2,000 | ) | 8,000 | |||
| Income before taxes | 50,000 | |||||
| Income taxes | 20,000 | |||||
| Net income | $ | 30,000 | ||||
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The following additional information is available for this year.
- The company declared and paid a cash dividend.
- Equipment was sold during the year for $8,000. The equipment originally cost $20,000 and had accumulated depreciation of $10,000.
- Long-term investments that cost $20,000 were sold during the year for $30,000.
- 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.
