Cheryl Wilson, president of Rivers Company, considers $39,000 to be a minimum ca
ID: 2431553 • Letter: C
Question
Cheryl Wilson, president of Rivers Company, considers $39,000 to be a minimum cash balance for operating purposes. As can be seen from the following statements, only $34,000 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.
The company sold long-term investments with an original cost of $68,000 for $97,500 during the year.
Equipment that had cost $128,000 and on which there was $59,000 in accumulated depreciation was sold during the year for $59,200.
The stock of a dissident stockholder was repurchased for cash and retired during the year. No issues of stock were made.
Using the indirect method, determine the net cash provided by (used in) operating activities for 2011. (Negative amount should be indicated by a minus sign.)
Prepare a statement of cash flows for 2011. (Amounts to be deducted and negative amounts should be indicated with a minus sign.)
Compute free cash flow for 2011. (Negative amount should be indicated by a minus sign.)
Rivers CompanyComparative Balance Sheet
December 31, 2011, and 2010 2011 2010 Assets Current assets: Cash $ 34,000 $ 55,800 Accounts Receivable 222,800 234,700 Inventory 267,100 207,400 Prepaid expenses 20,300 37,800 Total current assets 544,200 535,700 Long-term investments 147,000 215,000 Plant and equipment 898,000 769,000 Less accumulated depreciation 219,500 195,700 Net plant and equipment 678,500 573,300 Total assets
$ 1,369,700 $ 1,324,000 Liabilities and Stockholders' equity Current liabilities: Accounts payable $ 192,100 $ 250,900 Accrued liabilities 9,900 18,800 Income taxes payable 57,200 48,500 Total current liabilities 259,200 318,200 Bonds Payable 257,000 138,000 Total liabilities 516,200 456,200 Stockholders’ equity: Common stock 642,500 695,000 Retained earnings 211,000 172,800 Total stockholders' equity 853,500 867,800
Total liabilities and stockholders' equity $ 1,369,700 $ 1,324,000
Explanation / Answer
Requirement 1
Cash Flows from Operating Activity
Net Income
$ 102,680.00
Adjustments to reconcile net income to net cash flows from Operating Activities
Depreciation expense
$ 82,800.00
Gain on sale of Investment
$ -29,500.00
Loss on sale of equipment
$ 9,800.00
Changes In Current Assets and Current Liabilities
Decrease in Accounts Receivable
$ 11,900.00
Increase in Inventory
$ -59,700.00
Decrease in Prepaid Expenses
$ 17,500.00
Decrease in Accounts Payable
$ -58,800.00
Increase in Income tax payable
$ 8,700.00
Decrease in Accrued Liability
$ -8,900.00
$ -26,200.00
Net cash flow from Operating activities
$ 76,480.00
Requirement 2
Rivers Company
Statement of Cash Flows
For the Year ended December 31,2011
A. Cash Flows from Operating Activity
Net Income
$ 102,680.00
Adjustments to reconcile net income to net cash flows from Operating Activities
Depreciation expense
$ 82,800.00
Gain on sale of Investment
$ -29,500.00
Loss on sale of equipment
$ 9,800.00
Changes In Current Assets and Current Liabilities
Decrease in Accounts Receivable
$ 11,900.00
Increase in Inventory
$ -59,700.00
Decrease in Prepaid Expenses
$ 17,500.00
Decrease in Accounts Payable
$ -58,800.00
Increase in Income tax payable
$ 8,700.00
Decrease in Accrued Liability
$ -8,900.00
$ -26,200.00
Net cash flow from Operating activities
$ 76,480.00
B. Cash flows from Investing Activities
Sales of Investment
$ 97,500.00
Purchase of Equipment
$-257,000.00
Sale Of Equipment
$ 59,200.00
Net Cash Used in Investing activities
$ -100,300.00
C. Cash Flows from Financing activities
Retirement of Common stock
$ -52,500.00
Proceeds from Bonds Issue
$ 119,000.00
Dividends Paid
$ -64,480.00
Cash flows from Financing activities
$ 2,020.00
Net Increase (Decrease) in Cash [A+B+C]
$ -21,800.00
Cash at the beginning
$ 55,800.00
Cash at the end
$ 34,000.00
Free Cash Flow
Operating Cash flow - Cash used in Investing Activities
($76480-100300)
$ -23,820.00
Working Note 1 equipment purchased
Closing value of Equipment account in 2010
$ 769,000.00
Less: Equipment sold
$ 128,000.00
$ 641,000.00
Less: Closing value of equipment in 2011
$ 898,000.00
Purchase of equipment
$ 257,000.00
Working note 2 – Depreciation expense for current year
Closing value of Accumulated depreciation account in 2010
$ 195,700.00
Less: Accumulated Depreciation on asset sold
$ 59,000.00
$ 136,700.00
Closing value of Accumulated depreciation account in 2011
$ 219,500.00
Depreciation expense for the year
$ 82,800.00
Cash Flows from Operating Activity
Net Income
$ 102,680.00
Adjustments to reconcile net income to net cash flows from Operating Activities
Depreciation expense
$ 82,800.00
Gain on sale of Investment
$ -29,500.00
Loss on sale of equipment
$ 9,800.00
Changes In Current Assets and Current Liabilities
Decrease in Accounts Receivable
$ 11,900.00
Increase in Inventory
$ -59,700.00
Decrease in Prepaid Expenses
$ 17,500.00
Decrease in Accounts Payable
$ -58,800.00
Increase in Income tax payable
$ 8,700.00
Decrease in Accrued Liability
$ -8,900.00
$ -26,200.00
Net cash flow from Operating activities
$ 76,480.00
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