Question

Comparative financial statement data for Carmono Company follow: This Year Last Year Assets Cash $ 14.00 $ 27.00 Accounts receivable 76.00 69.00 Inventory 125.00 113.00 Total current assets 215.00 209.00 Property, plant, and equipment 270.00 220.00 Less accumulated depreciation 56.00 42.00 Net property, plant, and equipment 214.00 178.00 Total assets $ 429.00 $ 387.00 Liabilities and Stockholders’ Equity Accounts payable $ 75.00 $ 59.00 Common stock 170.00 130.00 Retained earnings 184.00 198.00 Total liabilities and stockholders’ equity $ 429.00 $ 387.00 For this year, the company reported net income as follows: Sales $ 1,500.00 Cost of goods sold 900.00 Gross margin 600.00 Selling and administrative expenses 580.00 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

Statement of cash flows

I. Cash flows from operating activities
Net income	20
Depreciation	14
Increase in current assets:
Accounts receivable	- 7
Inventory	- 12
Increase in current liabilities (Accounts payable)	16
Net cash flows from operating activities		31
II. Cash flows from Investing activities
Purchase of property	- 50
Net cash used in Investing activities		- 50
III. Cash flows from Financing activities
Issue of common stock	40
Cash dividend paid	- 34
Net cash flows from Financing activities		6
Net increase in cash (I + II + III)		- 13
Cash balance, beginning		27
Cash balance, ending		14

Cash dividend paid = Retained earnings, beginning + Net income - Retained earnings, ending

= 198 + 20 - 184

= $34

Free Cash flow = Operating cash flow – Capital expenditure

= 31 - 50

= - $19

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