Question

Mary Walket, president of Rusco Products, 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 2009 . Because 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.
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:Compute free cash flow for 2009.

Answer 1

1. Rusco Products

Statement of money Flows (Indirect Approach)

For the year ending New Year's Eve , 2015

Cash flows from operating activities:  

Net income  =$30,000

Add (deduct) non cash effects on operating income  

Depreciation expense  = $20,000      Movement in Account      Depreciated account: -       $50,000 - $10,000 = $40,000 - $60,000

Gain on sale of investment       $(10,000)

Loss on sale of kit    =  $2,000

Increase in deferred taxes  =   $8,000

Increase in assets   $(40,000 )  An increase should be deducted because it implies that not all sales were received in cash

Increase in inventory   =  $(50,000 ) a rise is deducted because cash was invested in inventory

Decrease in prepaid expenses      $4,000  A decrease are going to be added because no all expenses were paid in cash

Increase in accounts payable $63,000 a rise will be added as it implies that cash was generated from supplier credit

Decrease in accrued expenses $(9,000 )  A decrease is deducted as cash was spent to settle it

Net cash provided by operating activities  $18,000

Cash flows from investing activities:

Proceeds on sale of investment =30,000

Proceeds on sale of kit =8,000

Purchase of kit = $(150,000 )

Movement in Plant and Equipment account: - $300,000 - $20,000 = $280,000 - $430,000

Net cash employed by investing activities=  $(112,000)

Cash flows from financing activities:  

Bonds issued   =70,000

Proceeds from issuing stock =   $20,000  

 Movement in common shares acc: - $250,000 + $(96,000 - $80,000 = 416,000) = $266,000 - $286,000

Dividends paid= $(9,000)

Net cash provided by financing activities=  $81,000

Net decrease in cash  =$(13,000)

Cash balance at January 1, 2015 = $21,000

Cash balance at New Year's Eve , 20= $8,000

2. The free income can be calculated from the cash flow statement like this:

Operating income= $18,000

Less: Capital expenditures= (112,000)

= Free income= $94,000

3. we will see from the cash flow statement that the company:

Managed to get a positive cash flow from operations despite the heavy investment in inventories and the increase in accounts receivable by increasing its trade credit.

The cash position declined though, due to the e purchase  equipment es that was in excess of the amount raised from he bond issue.

Cash Flow Statement by the Indirect Method:

The income statement is one of the fundamental financial statements. In it, the state of the cash asset of a corporation is analyzed by reporting on how much cash was used y or provided by operating, investing, and financing activities.

Learn more about income statement:

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