This question is from chapter 14 of Managerial Accounting 16 th edition by Ray G

Question

This question is from chapter 14 of Managerial Accounting 16th edition by Ray Garrison.

Problem 14-13 Prepare and Interpret a Statement of Cash Flows; Free Cash Flow LO14-1, LO14-2, L014-3] Mary Walker, president of Rusco Company, considers $25,000 to be the 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 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 This Year Last Year Assets Current assets: Cash * 20,000 $ 39,000 216,500 199,000 227,000 254,500 500 512,000 Accounts Receivable Inventory Prepaid expenses Total current assets Long-term investments Plant and equipment 475,500 105,000145,000 755, 000 Less accumulated depreciation Net plant and equipment Total assets Liabilities and Stockholders' Equity Current liabilities: 870,000 212,500 657,500 $1,274,500 563,500 $1,184,000 $ 176,000 6,000 $ 235,500 500 46,000 290,000 215,000 505,000 Accounts payable Accrued liabilities Income taxes payable Total current liabilities Bonds Payable Total liabilities Stockholders' equity: 233,500 110,000 343,500 642,500 127,000 625,000 215,500 769,500840,500 $1,184, 000 Common stock Retained earnings Total stockholders equity Total liabilities and stockholders equity $1,274,500 Rusco Company Income Statement For This Year Ended July 31 Cost of goods sold Gross margin Selling and administrative expenses Net operating income Nonoperating items: $900,000 562,500 337,500 240,750 96,750 Gain on sale of investments $22,500 15,500 112,250 650 $ 78,600 (7,000) Loss on sale of equipment Income before taxes Income taxes Net income The following additional information is available for this year a. The company declared and paid a cash dividend b. Equipment was sold during the year for $48,000. The equipment originally cost $100,000 and had accumulated depreciation of $45,000 c. Long-term investments that cost $40,000 were sold during the year for $62,500. d. The company did not retire any bonds payable or repurchase any of its common stock.

Explanation / Answer

Cash flow indirect method Cash flow from operating activities Net income 78600 Adjustments to reconcile the net income Loss on sale of equipment 7000 Depreciation expense 66000 Gain on sale of investments -22500 Changes in current asset and liabilities Increase in accounts receivable -10500 Increase in Inventory -55500 Decrease in prepaid expense 10500 Increase in accounts payable 59500 Decrease in accrued liabilities   -7500 Increase in income tax payable 4500 51500 Cash flow from operating activities 130100 Cash flow from Investing activities Equipment purchased -215000 Equipment sold 48000 Long term investment sold 62500 Cash flow from Investing activities -104500 Cash flow from Financing activities Paid in capital in excess Common stock 17500 Dividend -167100 Bonds payable 105000 Cash flow from Financing activities -44600 Net Cash and cash equivalent -19000 Add Beginning cash and cash equivalent 39000 Ending cash and cash equivalent 20000

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