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Mary Walker, president of Rusco Company, considers $37,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $32,000 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.

Rusco Company Comparative Balance Sheet at July 31
	This Year			Last Year
Assets
Current assets:
Cash and cash equivalents	$	32,000		$	53,400
Accounts receivable		220,400			232,100
Inventory		265,300			206,200
Prepaid expenses		18,900			35,400
Total current assets		536,600			527,100
Long-term investments		141,000			205,000
Plant and equipment		894,000			767,000
Less accumulated depreciation		218,500			195,100
Net plant and equipment		675,500			571,900
Total assets	$	1,353,100		$	1,304,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	190,300		$	248,700
Accrued liabilities		9,700			18,400
Income taxes payable		55,600			47,500
Total current liabilities		255,600			314,600
Bonds payable		251,000			134,000
Total liabilities		506,600			448,600
Stockholders equity:
Common stock		719,400			685,000
Retained earnings		127,100			170,400
Total stockholders' equity		846,500			855,400
Total liabilities and stockholders' equity	$	1,353,100		$	1,304,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,140,000
Cost of goods sold						712,500
Gross margin						427,500
Selling and administrative expenses						304,950
Net operating income						122,550
Nonoperating items:
Gain on sale of investments	$	28,500
Loss on sale of equipment		(9,400	)			19,100
Income before taxes						141,650
Income taxes						42,410
Net income					$	99,240

The following additional information is available for this year.

1. The company declared and paid a cash dividend.

2. Equipment was sold during the year for $57,600. The equipment originally cost $124,000 and had accumulated depreciation of $57,000.

3. Long-term investments that cost $64,000 were sold during the year for $92,500.

4. The company did not retire any bonds payable or repurchase any of its common stock.

Because the Cash account decreased so dramatically during this year, the companys executive committee is anxious to see how the income statement would appear on a cash basis.

Required:

1. Using the direct method, adjust the companys 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.

The following changes took place last year in Pavolik Companys balance sheet accounts:

Asset and Contra-Asset Accounts				Liabilities and Stockholders' Equity Accounts
Cash and cash equivalents	$	6	D	Accounts payable	$	20	I
Accounts receivable	$	10	I	Accrued liabilities	$	10	D
Inventory	$	30	D	Income taxes payable	$	15	I
Prepaid expenses	$	5	I	Bonds payable	$	97	I
Long-term investments	$	7	D	Common stock	$	40	D
Property, plant, and equipment	$	180	I	Retained earnings	$	30	I
Accumulated depreciation	$	40	I

D = Decrease; I = Increase.

Long-term investments that cost the company $7 were sold during the year for $18 and land that cost $17 was sold for $10. In addition, the company declared and paid $14 in cash dividends during the year. Besides the sale of land, no other sales or retirements of plant and equipment took place during the year. Pavolik did not retire any bonds during the year or issue any new common stock.

The companys income statement for the year follows:

Sales					$	600
Cost of goods sold						250
Gross margin						350
Selling and administrative expenses						280
Net operating income						70
Nonoperating items:
Loss on sale of land	$	(7	)
Gain on sale of investments		11				4
Income before taxes						74
Income taxes						30
Net income					$	44

The companys beginning cash balance was $100 and its ending balance was $94.

Required:

1. Use the indirect method to determine the net cash provided by operating activities for the year.

2. Prepare a statement of cash flows for the year.

Wiley Companys income statement for Year 2 follows:

Sales	$	2,450
Cost of goods sold		1,400
Gross margin		1,050
Selling and administrative expenses		400
Income before taxes		650
Income taxes		260
Net income	$	390

The companys selling and administrative expense for Year 2 includes $80 of depreciation expense. Selected balance sheet accounts for Wiley at the end of Years 1 and 2 are as follows:

	Year 2			Year 1
Current Assets
Accounts receivable	$	205		$	240
Inventory	$	158		$	184
Prepaid expenses	$	42		$	20
Current Liabilities
Accounts payable	$	116		$	72
Accrued liabilities	$	15		$	21
Income taxes payable	$	116		$	90

Required:

1. Using the direct method, convert the companys income statement to a cash basis?

2. Assume that during Year 2 Wiley had a $14,000 gain on sale of investments and a $5,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?

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