Question

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash	$	4.50		$	8.00
Accounts receivable		38.00			31.00
Inventory		77.50			63.60
Total current assets		120.00			102.60
Property, plant, and equipment		213.00			182.00
Less accumulated depreciation		40.80			30.60
Net property, plant, and equipment		172.20			151.40
Total assets	$	292.20		$	254.00
Liabilities and Stockholders’ Equity
Accounts payable	$	46.50		$	40.00
Common stock		94.00			73.00
Retained earnings		151.70			141.00
Total liabilities and stockholders’ equity	$	292.20		$	254.00

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

Sales	$	550.00
Cost of goods sold		330.00
Gross margin		220.00
Selling and administrative expenses		200.00
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 Company Statement of Cash Flows For This Year Ended December 31 Operating activities: Net income $20.00 Adjustments to convert net income to a cash basis Depreciation $10.20 Increase in accounts receivable (7.00) Increase in inventory (13.90) Increase in accounts payable 6.50 (4.20) Net cash provided by operating activities 15.80 Investing activities: Increase in plant and equipment (31.00) Net cash used in investing activities (31.00) Financing activities: Issuance of common stock 21.00 Cash dividends (9.30) Net cash provided by financing activities 11.70 Net decrease in cash (3.50) Beginning cash and cash equivalents 8.00 Ending cash and cash equivalents $4.50

2.

	Free cash flow

     

  

Answer 1

Answer 1.

$ 20.00 10.20 -7.00 - 13.90 6.50 $ Carmono Company Statement of Cash Flows For This Year Ended December 31 Cash flows from Operating Activities Net Income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense $ Increase in accounts receivable $ Increase in inventory $ Increase in accounts payable $ Net cash provided by Operating Activities Cash flows from Investing Activities Increase in plant and equipment $ Net cash used in Investing activities Cash flows from Financing Activities Issuance of common stock $ Cash dividends paid $ Net Cash provided by Financing Activities Net decrease in cash Beginning cash and cash equivalent Ending cash and cash equivalent 4.20 15.80 -31.00 $ -31.00 21.00 9.30 $ 11.70 -3.50 8.00 4.50 $

Dividend paid = Beginning Retained Earnings + Net Income - Ending Retained Earnings
Dividend paid = $141.00 + $20.00 - $151.70
Dividend paid = $9.30

Answer 2.

Free Cash Flow = Net cash provided by Operating Activities - Capital Expenditure - Dividend Paid
Free Cash Flow = $15.80 - $31.00 - $9.30
Free Cash Flow = -$24.50