Question

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash	$	14.50		$	28.00
Accounts receivable		78.00			71.00
Inventory		127.50			115.60
Total current assets		220.00			214.60
Property, plant, and equipment		273.00			222.00
Less accumulated depreciation		56.80			42.60
Net property, plant, and equipment		216.20			179.40
Total assets	$	436.20		$	394.00
Liabilities and Stockholders’ Equity
Accounts payable	$	76.50		$	60.00
Common stock		174.00			133.00
Retained earnings		185.70			201.00
Total liabilities and stockholders’ equity	$	436.20		$	394.00

For this year, the company reported net income as follows:

Sales	$	1,550.00
Cost of goods sold		930.00
Gross margin		620.00
Selling and administrative expenses		600.00
Net income	$	20.00

This year Carmono declared and paid a cash dividend. There were no sales of property, plant, and equipment during this year. The company did not repurchase any of its own stock this year.

Required:

1. Using the indirect method, prepare a statement of cash flows for this year.

2. Compute Carmono’s free cash flow for this year.

Answer 1

1. Using the indirect method, prepare a statement of cash flows for this year.

Cash flow from operating activities
Net income	20
Adjustment to reconcile net income
Increase account receivable	(7)
Increase inventory	(11.90)
Increase account payable	16.50
Depreciation	14.2
Net cash flow from operating activities		31.80
cash flow from investing activities
Purchase of property, plant and equipment	(51)
Net cash flow from investing activities		(51)
Cash flow from financing activities
Issue common stock	41
Dividend paid	(35.30)
Net cash flow from financing activities		5.70
Net cash flow		(13.50)
Beginning cash		28
Ending cash		14.50

2. Compute Carmono’s free cash flow for this year.

Free cash flow = Cash flow from operating activities-purchase of property, plant & Equipment

= 31.80-51

Free cash flow = -19.2