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Book/movie review
22/08/2022
Sharon Feldman, president of Allied Company, considers $20,000 to be a minimum cash balance
for operating purposes. As can be seen from the following statements, only $15,000 in cash was
available at the end of 2011. Because the company reported a large net income for the year, and
also issued bonds and sold some long-term investments, the sharp decline in cash is puzzling to
Ms. Feldman.
Assets
Current assets:
Allied Company
Comparative Balance Sheet December 31, 2011, and 2010
2011 2010
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000 $ 33,000
Accounts receivable . . . . . . . . . . . . . . . . . 200,000 210,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 196,000
Prepaid expenses . . . . . . . . . . . . . . . . . . 7,000 15,000
Total current assets . . . . . . . . . . . . . . . . . . . 472,000 454,000
Long-term investments . . . . . . . . . . . . . . . . 90,000 120,000
Plant and equipment . . . . . . . . . . . . . . . . . . 860,000 750,000 Less
accumulated depreciation . . . . . . . . 210,000 190,000 Net plant and equipment .
. . . . . . . . . . . . . . 650,000 560,000 Total assets . . . . . . . . . . . . .
. . . . . . . . . . . . $1,212,000 $1,134,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 175,000 $ 230,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . 8,000 15,000
Income taxes payable . . . . . . . . . . . . . . . 42,000 39,000
Total current liabilities . . . . . . . . . . . . . . . . . 225,000 284,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . 200,000 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 425,000 384,000
Stockholders’ equity:
Common stock . . . . . . . . . . . . . . . . . . . . . 595,000 600,000
Retained earnings . . . . . . . . . . . . . . . . . . 192,000 150,000
Total stockholders’ equity . . . . . . . . . . . . . . . 787,000 750,000 Total
liabilities and stockholders’ equity . . . . $1,212,000 $1,134,000
Allied Company Income Statement
For the Year Ended December 31, 2011
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$800,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 500,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Selling and administrative expenses . . . . . . 214,000
Net operating income . . . . . . . . . . . . . . . . . 86,000
Nonoperating items:
Gain on sale of investments . . . . . . . . . . . $20,000
Loss on sale of equipment . . . . . . . . . . . . (6,000) 14,000
Income before taxes . . . . . . . . . . . . . . . . . . 100,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000
The following additional information is available for the year 2011:
a. The company sold long-term investments with an original cost of $30,000 for $50,000 during
the year.
b. Equipment that had cost $90,000 and on which there was $40,000 in accumulated deprecia- tion
was sold during the year for $44,000.
c. The company declared and paid a cash dividend during the year.
d. The stock of a dissident stockholder was repurchased for cash and retired during the year. No
issues of stock were made.
e. The company did not retire any bonds during the year.
Required:
1. Using the indirect method, compute the net cash provided by operating activities for 2011.
2. Prepare a statement of cash flows for 2011.
3. Compute free cash flow for 2011.
4. Explain the major reasons for the decline in the company’s cash balance.
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