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ACC - Sharon Feldman, president of Allied Company

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Question;Sharon Feldman, president of Allied Company, considers $20,000 to be a minimum cash balancefor operating purposes. As can be seen from the following statements, only $15,000 in cash wasavailable at the end of 2011. Because the company reported a large net income for the year, andalso issued bonds and sold some long-term investments, the sharp decline in cash is puzzling toMs. Feldman.AssetsCurrent assets:Allied CompanyComparative Balance Sheet December 31, 2011, and 20102011 2010Cash............................ $ 15,000 $ 33,000Accounts receivable................. 200,000 210,000Inventory......................... 250,000 196,000Prepaid expenses.................. 7,000 15,000Total current assets................... 472,000 454,000Long-term investments................ 90,000 120,000Plant and equipment.................. 860,000 750,000 Lessaccumulated depreciation........ 210,000 190,000 Net plant and equipment............... 650,000 560,000 Total assets......................... $1,212,000 $1,134,000Liabilities and Stockholders? EquityCurrent liabilities:Accounts payable................... $ 175,000 $ 230,000Accrued liabilities................... 8,000 15,000Income taxes payable............... 42,000 39,000Total current liabilities................. 225,000 284,000Bonds payable....................... 200,000 100,000Total liabilities....................... 425,000 384,000Stockholders? equity:Common stock..................... 595,000 600,000Retained earnings.................. 192,000 150,000Total stockholders? equity............... 787,000 750,000 Totalliabilities and stockholders? equity.... $1,212,000 $1,134,000Allied Company Income StatementFor the Year Ended December 31, 2011Sales..............................$800,000Cost of goods sold.................... 500,000Gross margin........................ 300,000Selling and administrative expenses...... 214,000Net operating income................. 86,000Nonoperating items:Gain on sale of investments........... $20,000Loss on sale of equipment............ (6,000) 14,000Income before taxes.................. 100,000Income taxes........................ 30,000Net income......................... $ 70,000The 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 duringthe year.b. Equipment that had cost $90,000 and on which there was $40,000 in accumulated deprecia- tionwas 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. Noissues 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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