Question

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash	$	9.00		$	17.00
Accounts receivable		56.00			49.00
Inventory		100.00			87.00
Total current assets		165.00			153.00
Property, plant, and equipment		240.00			200.00
Less accumulated depreciation		48.00			36.00
Net property, plant, and equipment		192.00			164.00
Total assets	$	357.00		$	317.00
Liabilities and Stockholders’ Equity
Accounts payable	$	60.00		$	49.00
Common stock		130.00			100.00
Retained earnings		167.00			168.00
Total liabilities and stockholders’ equity	$	357.00		$	317.00

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

Sales	$	1,000.00
Cost of goods sold		600.00
Gross margin		400.00
Selling and administrative expenses		380.00
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 to net cash flow from operating activities
Depreciation expense	12
Increase account receivable	-7
Increase inventory	-13
Increase account payable	11
		3
Net cash flow from operating activities		23
Cash flow from investing activities
Purchase Property, plant, and equipment	-40
Net cash used in investing activities		-40
Cash flow from financing activities
Issue common Stock	30
Dividend paid	-21
Net cash flow from financing activities		9
Net cash flow		-8
Beginning cash		17
Ending cash		9

Free cash flow = cash flow from operating activities - Purchase Property, plant, and equipment

= 23-40

Free cash flow = -17