Cheryl Wilson, president of Rivers Company, considers $25,000 to be a minimum ca
ID: 2467226 • Letter: C
Question
Cheryl Wilson, president of Rivers Company, considers $25,000 to be a 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 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. Wilson.
Rivers Company
Comparative Balance Sheet
December 31, 2011, and 2010
2011
2010
Assets
Current assets:
Cash
$
20,000
$
39,000
Accounts Receivable
206,000
216,500
Inventory
254,500
199,000
Prepaid expenses
10,500
21,000
Total current assets
491,000
475,500
Long-term investments
105,000
145,000
Plant and equipment
870,000
755,000
Less accumulated depreciation
212,500
191,500
Net plant and equipment
657,500
563,500
Total assets
$
1,253,500
$
1,184,000
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable
$
179,500
$
235,500
Accrued liabilities
8,500
16,000
Income taxes payable
46,000
41,500
Total current liabilities
234,000
293,000
Bonds Payable
215,000
110,000
Total liabilities
449,000
403,000
Stockholders’ equity:
Common stock
607,500
625,000
Retained earnings
197,000
156,000
Total stockholders' equity
804,500
781,000
Total liabilities and stockholders' equity
$
1,253,500
$
1,184,000
Rivers Company
Income Statement
For the Year Ended December 31, 2011
Sales
$
900,000
Cost of goods sold
562,500
Gross margin
337,500
Selling and administrative expenses
240,750
Net operating income
96,750
Non operating items:
Gain on sale of investments
$
22,500
Loss on sale of equipment
(7,000)
15,500
Income before taxes
112,250
Income taxes
33,650
Net income
$
78,600
The following additional information is available for the year 2011:
a.
The company sold long-term investments with an original cost of $40,000 for $62,500 during the year.
b.
Equipment that had cost $100,000 and on which there was $45,000 in accumulated depreciation was sold during the year for $48,000.
c.
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.
e.
The company did not retire any bonds during the year.
Required:
1.
Using the indirect method, determine the net cash provided by/used by operating activities for 2011. (Negative amount should be indicated by a minus sign.)
2.
Prepare a statement of cash flows for 2011. (Amounts to be deducted and negative amounts should be indicated with a minus sign.)
3.
Compute free cash flow for 2011. (Negative amount should be indicated by a minus sign.)
Cheryl Wilson, president of Rivers Company, considers $25,000 to be a 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 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. Wilson.
Explanation / Answer
1.
2.
Statement of cash flows:
Accumulated depreciation account
Equipment Account
Retained Earnings account
$ Net Income 78600 + Income tax 33650 Profit before tax 112250 + Loss on Sale of Equipment 7000 - Gain on sale of investments -22500 + Depreciation (212500+45000-191500) 66000 162750 + Decrease in accounts receivable 10500 - Increase in inventory -55500 + Decrease in prepaid expenses 10500 - Decrease in accounts payable -56000 - Decrease in accrued liabilites -7500 Cash flow before tax 64750 - Income Tax Paid [41500+33650-46000] -29150 Net cash flow from operating activities 35600Related Questions
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