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Cash Flow Statements: Allied Company - Indirect Method

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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.

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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The solution discusses cash flow statements for the Allied Company using the indirect method.

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