Question

Exercise 14-6 Prepare a Statement of Cash Flows; Free Cash Flow [LO14-1, LO14-2, LO14-3]

Comparative financial statement data for Carmono Company follow:

	This Year		Last Year
Assets
Cash	$	3	$	6
Accounts receivable		22		24
Inventory		50		40
Total current assets		75		70
Property, plant, and equipment		240		200
Less accumulated depreciation		65		50
Net property, plant, and equipment		175		150
Total assets	$	250	$	220
Liabilities and Stockholders’ Equity
Accounts payable	$	40	$	36
Common stock		150		145
Retained earnings		60		39
Total liabilities and stockholders’ equity	$	250	$	250

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

Sales	$	275
Cost of goods sold		150
Gross margin		125
Selling and administrative expenses		90
Net income	$	35

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. (List any deduction in cash and cash outflows as negative amounts.)

2.	Compute Carmono’s free cash flow for this year. (Negative amount should be indicated by a minus sign.)

Answer 1

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

Cash flow from operating activities
Net income	35
Adjustment to reconcile net income
Depreciation expense	15
Decrease account receivable	2
Increase inventory	-10
Increase account payable	4
Net cash flow from operating activities		46
Cash flow from investing activities
Purchase property,plant and equipment	-40
Net cash flow from investing activities		-40
Cash flow from financing activities
Issue common stock	5
Dividend paid	-14
Net cash flow from financing activities		-9
Net Cash flow		-3
Beginning Cash		6
Ending Cash		3

Free Cash flow = Cash flow from operating activities-Purchase of property,plant and equipment

= 46-40

Free cash flow = 6