PROBLEM 14 - Prepare and Interpret a Statement of Cash Flows; Free Cash Flow [ LO1, LO2, LO3] 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.
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 depreciation 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.
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.
The solution discusses cash flow statements for the Allied Company using the indirect method.