Question

Here are comparative balance sheets for Migitsu Company. Prepare a statement of cash flows—indirect method. MIGITSU COMPANY Comparative Balance Sheets December 31 Assets 2020 2019 Cash $75,000 $20,000 Accounts receivable 85,000 75,000 Inventories 172,000 192,000 Land 71,000 100,000 Equipment 262,000 200,000 Accumulated depreciation (67,000 ) (34,000 ) Total $598,000 $553,000 Liabilities and Stockholders’ Equity Accounts payable $35,000 $52,000 Bonds payable 151,000 209,000 Common stock ($1 par) 218,000 172,000 Retained earnings 194,000 120,000 Total $598,000 $553,000 Additional information: 1. Net income for 2020 was $105,000. 2. Cash dividends of $31,000 were declared and paid. 3. Bonds payable amounting to $58,000 were redeemed for cash $58,000. 4. Common stock was issued for $46,000 cash. 5. Equipment that cost $50,000 and had a book value of $30,000 was sold for $36,000 during 2020; land was sold at cost. What is the free cash flow for 2020?

Answer 1

Solution

Migitsu Company

Statement of cash flows (Indirect method):

Migitsu Company
Statement of Cash Flows
For the year ended December 31, 2020
Cash flow from operating activities:
net income		$105,000
adjustments to reconcile net income to net cash flow from operations:
Gain on sale of land	($6,000)
Depreciation	$53,000
Increase in accounts receivable	($10,000)
Decrease in inventories	$20,000
Decrease in accounts payable	($17,000)	$40,000
Cash flows from operating activities		$145,000
Cash flow from investing activities:
Sale of equipment	$36,000
sale of land	$29,000
Purchase of equipment	($112,000)
Cash flows from investing activities		($47,000)
Cash flows from financing activities:
Issue of common stock	$46,000
redemption of bonds payable	($58,000)
Dividends paid	($31,000)
Cash flows from financing activities		($43,000)
Net increase in cash		$55,000
Beginning cash balance		$20,000
Ending cash balance		$75,000

Computation of free cash flow from 2020:

Free cash flow = operating cash flow – capital expenditures

Operating cash flow = $145,000

Purchase of equipment –

Beginning balance = $200,000

Less: sale of equipment = 50,000

Subtotal = $150,000

Less: ending balance = $262,000

Purchase of equipment in current year = 262,000 – 150,000 = $112,000

Capital expenditure = $112,000

Free cash flow = 145,000 – 112,000 = $33,000