Question

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash	$	10.00		$	19.00
Accounts receivable		60.00			53.00
Inventory		105.00			92.20
Total current assets		175.00			164.20
Property, plant, and equipment		246.00			204.00
Less accumulated depreciation		49.60			37.20
Net property, plant, and equipment		196.40			166.80
Total assets	$	371.40		$	331.00
Liabilities and Stockholders’ Equity
Accounts payable	$	63.00		$	51.00
Common stock		138.00			106.00
Retained earnings		170.40			174.00
Total liabilities and stockholders’ equity	$	371.40		$	331.00

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

Sales	$	1,100.00
Cost of goods sold		660.00
Gross margin		440.00
Selling and administrative expenses		420.00
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.

Carmono CompanyStatement of Cash FlowsFor This Year Ended December 31Operating activities:Investing activities:Financing activities:Beginning cash and cash equivalentsEnding cash and cash equivalents

Carmono Company
Statement of Cash Flows
For This Year Ended December 31
Operating activities:
Investing activities:
Financing activities:
Beginning cash and cash equivalents
Ending cash and cash equivalents

Answer 1

SOLUTION

(A)

Carmono Company

Statement of Cash Flows

For This Year Ended December 31

	Amount ($)	Amount ($)
Operating activities:
Net income		20.00
Adjustments to convert net income to a cash basis:
Depreciation ($49.60 - $37.20)	12.40
Increase in accounts receivable ($60 - $53)	(7.00)
Increase in inventory ($105.00 - $92.20)	(12.80)
Increase in accounts payable ($63 - $51)	12.00
		4.60
Net cash provided by operating activities (A)		24.60
Investing Activities:
Increase in Property, plant, and equipment ($246 - $204)	(42.00)
Net cash used in investing activities (B)		(42.00)
Financing activities:
Increase in common stock ($138 - $106)	32.00
Cash Dividends	(23.60)
Net cash used in Financing activities (C)		8.40
Net increse / (decrease) in cash (A+B+C)		(9.00)
Beginning cash balance		19.00
Ending cash balance		10.00

(B) Free cash flow-

	Amount ($)
Net cash flow from operating activities	24.60
Capital expenditures	(42.00)
Dividends	(23.60)
Free cash flow	$41.00