Mary Walker, president of Rusco Products, considers $14,000 to be the minimum ca
ID: 2444123 • Letter: M
Question
Mary Walker, president of Rusco Products, considers $14,000 to be the minimum cash balalnce for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of 2009. 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 Products
Comparative Balance Sheet
July 31, 2009 and 2008
2009 2008
Assets
Current Assets:
Cash................................................. $8,000 $21,000
Accounts Rec....................................... 120,000 80,000
Inventory........................................... 140,000 90,000
Prepaid Exp........................................ 5,000 9,000
Total Current Assets.................................. 273,000 200,000
Long-term Investments.............................. 50,000 70,000
Pant and equipment.................................. 430,000 300,000
Less Accumulated Depriciation................. 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
Total Current Liabilities........................... 131,000 77,000
Bonds Payable....................................... 70,000
Deferred Income Taxes............................ 20,000 12,000
Total Liabilities..................................... 221,000 89,000
Stockholders Equity:
Preferred Stock................................. 80,000 96,000
Common Stock.................................. 286,000 250,000
Retained Earnings.............................. 106,000 85,000
Total Stockholders Equity......................... 472,000 431,000
Total Liabilities and Stockholders Equity........ $693,000 $520,000
Rusco Products
Income Statement
For the Year Ended July 31, 2009
Sales..................................................................... $500,000
Cost of Goods Sold..................................................... 300,000
Gross Margin........................................................... 200,000
Selling and Administrative Exp....................................... 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
The following additional information is available for the year 2009.
a. Dividends totaling $9,000 were declared and paid in cash.
b. Equipment was sold during the year for $8,000. The equipment had originally cost $20,000 and had accumulated depreciation of $10,000
c. The decrease in the Preferred Stock account is the result of a conversion of preferred stock into an equal dollar amount of common stock
d. Long-term investments that had cost $20,000 were sold during the year for $30,000
Required:
1. Using the indirect method, compute the net cash provided by operating activities for 2009.
2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for 2009.
3. Compute free cash flow for 2009.
4. Explain the major reasons for the decline in the company's cash balance.
Explanation / Answer
1. Using the indirect method, compute the net cash provided by operating activities for 2009
Net Income
$30,000
Income tax
$20,000
Depreciation
$10,000
Loss on sale of equipment
$2,000
Gain on sale of investment
($10,000)
Increase in Accounts Receivables
($40,000)
Decrease in Inventory
(50,000)
Prepaid Expenses
($4,000)
Accounts Payables
$63,000
Accrued Liabilities
($9,000)
Total
$18,000
2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for 2009.
Cash Flow Statement
For the year 2009
====================
Net cash provided by operating activities $18,000
Cash Flow From Financial Activities
===============================
Issuance of Bonds $70,000
Issuance of common stock $20,000
Dividend payment ($9,000)
___________
Net Cash provided by Financial activities $81,000
Cash Flow From Investing Activities
================================
Sale of equipment $8,000
Sale of Investment $30,000
Purchase of equipment ($150,000)
_____________
Net Cash provided by Investing activities ($112,000)
Total cash flow ($13,000)
Beginning cash balance $21,000
Ending cash balance $8,000
==========
3. Compute free cash flow for 2009
Free Cash Flow = Cash flow from operations + After-tax interest expense – Capital expenditures
= $18,000 - $112,000 = ($94,000)
4. Explain the major reasons for the decline in the company's cash balance.
The major reason in declining company's cash balance is due to investment in Plant & Equipment to the tune of net $112,000 after utilizing proceeds from sale of equipment and sale of investment. The cash flow for the period is ($13,000) that reduced the ending cash balance to $8,000.
Net Income
$30,000
Income tax
$20,000
Depreciation
$10,000
Loss on sale of equipment
$2,000
Gain on sale of investment
($10,000)
Increase in Accounts Receivables
($40,000)
Decrease in Inventory
(50,000)
Prepaid Expenses
($4,000)
Accounts Payables
$63,000
Accrued Liabilities
($9,000)
Total
$18,000