Question: Refer to the financial statements for Rusco
Refer to the financial statements for Rusco Company in Problem 14–13. Because the Cash account decreased so dramatically during this year, the company’s executive committee is anxious to see how the income statement would appear on a cash basis.
Data given in Exercise 14-13:
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 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.
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 $8,000. The equipment originally cost $20,000 and had accumulated depreciation of $10,000.
c. Long-term investments that 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 direct method, adjust the company’s income statement for this year to a cash basis.
2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for this year.
3. Briefly explain the major reasons for the sharp decline in cash during this year.
Transcribed Image Text:
Rusco Company Comparative Balance Sheet at July 31 This Year Last Year Assets Current assets: $ 8,000 120,000 Cash and cash equivalents $ 21,000 80,000 90,000 Accounts receivable Inventory 140,000 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 Income taxes payable 20,000 12,000 Total current liabilities 151,000 89,000 Bonds payable 70,000 Total liabilities 221,000 89,000 Stockholders' Equity: Common stock . 366,000 346,000 Retained earnings 106,000 85,000 Total stockholders' equity 472,000 431,000 Total liabilities and stockholders' equity $693,000 $520,000 Rusco Company Income Statement For This Year Ended July 31 Sales .... $500,000 Cost of goods sold 300,000 Gross margin .... Selling and administrative expenses Net operating income. Nonoperating items: 200,000 158,000 42,000 Gain on sale of investments $10,000 Loss on sale of equipment (2,000) 8,000 Income before taxes 50,000 Income taxes . 20,000 Net income $ 30,000
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