Question

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash	$	12.50		$	24.00
Accounts receivable		70.00			63.00
Inventory		117.50			105.20
Total current assets		200.00			192.20
Property, plant, and equipment		261.00			214.00
Less accumulated depreciation		53.60			40.20
Net property, plant, and equipment		207.40			173.80
Total assets	$	407.40		$	366.00
Liabilities and Stockholders’ Equity
Accounts payable	$	70.50		$	56.00
Common stock		158.00			121.00
Retained earnings		178.90			189.00
Total liabilities and stockholders’ equity	$	407.40		$	366.00

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

Sales	$	1,350.00
Cost of goods sold		810.00
Gross margin		540.00
Selling and administrative expenses		520.00
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.

statement of cash flows

Operating activities (i)
Net income	20
Depreciation expense	13.40
Incresase in accounts receivable	-7
Increase in inventory	-12.30
Increase in accounts payable	14.50
Net cash flow from operating activities		28.6
Investing activities (ii)
Purchase of property, plant and equipment	-47
Net cash used in investing activities		-47
Financing activities (iii)
Issue of common stock	37
Cash dividend paid	-30.1
Net cash flow from financing activities		6.9
Net increase in cash (i + ii + iii)		-11.50
beginning cash		24
Ending cash		12.50

cash dividend paid = retained earnings, beginning + Net income - retained earning, ending

= 189 + 20 - 178.90

= $30.1

2.

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

= 28.6 - 30.1 - 47

= -$48.5