Question

PROBLEM 14-13 Prepare and interpret a Statement of Cash Flows; Free Cash Flow (L014-1, L014-2, L014-3] Mary Walker, president of Rusco Company, 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 avail- able at the end of 2014. 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 July 31, 2014 and 2013 2014 2013 $ 8.000 120,000 140,000 5,000 273,000 50,000 430,000 60,000 370,000 $693,000 $ 21,000 80,000 90,000 9,000 200,000 70,000 300,000 50,000 250,000 $520,000 Assets Current assets: Cash....... Accounts receivable ................... Inventory ................... Prepaid expenses................. Total current assets ............. Long-term investments ............... Plant and equipment .... Less accumulated depreciation ........ Net plant and equipment .................. Total assets ................... Liabilities and Stockholders' Equity Current liabilities: Accounts payable ....... Accrued liabilities .... Income taxes payable ...... Total current liabilities ......... Bonds payable..... Total liabilities ........ Stockholders' equity: Common stock ........ Retained earnings ..................... Total stockholders' equity ................. Total liabilities and stockholders' equity....... $123,000 8.000 20.000 151,000 70,000 221,000 $ 60,000 17,000 12,000 89,000 89,000 366,000 106.000 472,000 $693,000 346,000 85,000 431,000 $520,000 Rusco Company Income Statement For the Year Ended July 31, 2014 $500,000 300,000 200,000 158,000 42,000 Sales ......... Cost of goods sold .......... Gross margin ...................... Selling and administrative expenses .... Net operating income ............... Nonoperating items: Gain on sale of investments ......... Loss on sale of equipment .......... Income before taxes ................ Income taxes ................. Net income .............. $10,000 (2,000 8,000 50,000 20,000 $ 30,000 The following additional information is available for the year 2014. a. The company declared and paid a cash dividend. 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. Long-term investments that had cost $20,000 were sold during the year for $30,000. d. The company did not retire any bonds payable or repurchase any of its common stock. Required: 1. Using the indirect method, compute the net cash provided by operating activities for 2014. 2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for 2014. Compute free cash flow for 2014. 4. Explain the major reasons for the decline in the company's cash balance.