Question

Ronaldo Company has not yet prepared the statement of cash flows. The Balance sheet as of December 31, 2018 and January 1, 2018 and the additional information regarding the statement of income and retained earnings for the year are presented below.

Ronaldo Company

Comparative Balance Sheet

(Dollars in Millions)

Assets                                                                  12/31/2018                                   1/1/2018    

Current Assets:

            Cash                                                                $   98                                     $ 158

            Account Receivables                                      1,290                                      1,160

            Inventory                                                        1,320                                     1,230

Total Current Assets                                                   2,708                                       2,548

Property, Plant, and Equipment                     3,030                           2,932

Less Accumulated Depreciation                     1,530                          1,282

Net Property, Plant, and Equipment                             1,500                                      1,650

Total Assets                                                              $4,208                                 $4,198

Liability and Equity

Current Liability:

            Account payable                                             $500                                           $310

            Accrued Liability                                              380                                             330

            Income tax payable                                            152                                             140

Total current Liability                                                $1,032                                         $780

Bonds payable                                                                  900                                         1,240

Total Liability                                                               1,932                                         2,020

Stockholders’ Equity:

            Common Stock                                                     322                                            322

            Retained earnings                                              1,954                                          1,856

Total Stockholders’ Equity                                             2,276                                         2,178

Total Liability and Stockholders’ Equity                      $4,208                                      $4,208

Ronaldo Income statement ((Dollars in Millions)

Net Income                                                     $7,200

Cost of goods sold                                          5,100

Gross Margin                                                  2,100

Selling and administrative Expenses              1,750

Net Operating Income                                        350

Nonoperation items:

            Gain on sale of Equipment                        6

Income before Taxes                                            356

Income tax                                                            126

Net Income                                                        $ 230

Ronaldo also provided the following information:

1. The company sold equipment that had an original cost of $26 million and accumulated depreciation of $16 million. The cash proceeds from the sale were $16 million. The gain on the sale was $6 million
2. The company did not issue any bonds during the year.
3. The company paid a cash dividend during the year
4. The company did not complete any common stock transactions during the year

Required:

1. Prepare a statement of cash flows for the year using the indirect method
2. Compute Ronaldo’s free cash flow
3. Assume that Ronaldo has sales of $7,600, Net income of $230, and net cash provided by operating activities of $300 in the prior year. Prepare a memo that summarizes your interpretations of Ronaldo’s financial performance
4. Use the analysis of Ronaldo Company to illustrate how information in the balance sheet and the statement of cash flows helps the users of the financial statements.

ANSWER PART 3 AND 4

Answer 1

Cash flow statement

Cash flow from operating activities
Net Income	230
Add: Depreciation	264
less:Gain on sale of Equipment	(6)
	488
increase in accounts receivable	(130)
increase in inventory	(90)
increase in accounts payable	190
increase in Accrued Liability	50
increase in income tax payable	12
net cash provided by operating activity		520
Cash flow from investing activities
cash proceeds from the sale of equipment	16
purchase of equipment	(124)
Net cash used by investing activities		(108)
Cash flow from financing activities
payment of Bonds payable	(340)
cash dividend	(132)
Net cash used by financing activities		(472)
Net decrease in cash		(60)
add: cash at beginning		158
Cash at end		98

Note:- 1. Cash dividend = beginning retained earnings + net income - ending retained earnings

= 1856 + 230 - 1954

= 132

2. Depreciation expense = Ending Accumulated depreciation + sold Equipment accumulated depreciation - Beginning Accumulated depreciation

=  1,530 + 16 - 1,282

= 264