Problem:
Mary Walker, president of Rusco Products, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the statement below, only $8,000 in cash was available at the end of 2005. 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 Products
Comparative Balance Sheets
July 31, 2006 and 2004
Assets 2004 2005
Current assets
Cash.......................................................... $8,000 $21,000
Accounts receivable........................................$120,000 80,000
Inventory......................................................140,000 90,000
Prepaid expenses............................................ 5,000 9,000
Total current assets........................................... 273,000 200,000
Long-term investments...................................... 50,000 70,000
Plant and equipment........................................ 430,000 300,000
Less accumulated depreciation................... 60,000 50,000
Net plant and equipment.................................. 370,000 250,000
Total assets................................................. $693,000 $520,000
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable................................................$123,000 $60,000
Accrued liabilities................................................. 8,000 17,000
Total current liabilities............................................ 131,000 77,000
Bonds payable..................................................... 70,000
Deferred income taxes........................................... 20,000 12,000
Stockholders' equity
Preferred stock.................................................. 80,000 96,000
Common stock................................................. 286,000 250,000
Retained earnings.............................................. 106,000 85,000
Total stockholders' equity........................................ 472,000 431,000otal
Total liabilities and stockholders'equity....................... $693,000 $520,000
Rusco Products
Income Statement
For the Year Ended July 31, 2005
Sales......................................................................... $500,000
Less cost of goods sold.................................................... 300,000
Gross margin............................................................. 200,000
Less operating expenses.............................................. 158,000
Net operating income................................................. 42,000
Nonoperating items:
Gain on sale of investments................................................. $10,000
Loss on sale of equipment................................................... 2,000 8,000
Income before taxes............................................................ 50,000
Less income taxes.............................................................. 20,000
Net income..................................................................... $30,000
The following additional information is available for the year 2005.
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 to do:
Question 1. Using the indirect method, compute the net cash by operating activities for 2005.
Question 2. Using the data from (1) above and other data from the problem as needed, prepare a statement of cash flows for 2005.
Question 3. Explain the major reasons for the decline in the company’s cash position.