Question

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash and cash equivalents	$	7.00		$	13.00
Accounts receivable		48.00			41.00
Inventory		90.00			76.60
Total current assets		145.00			130.60
Property, plant, and equipment		228.00			192.00
Less accumulated depreciation		44.80			33.60
Net property, plant, and equipment		183.20			158.40
Total assets	$	328.20		$	289.00
Liabilities and Stockholders’ Equity
Accounts payable	$	54.00		$	45.00
Common stock		114.00			88.00
Retained earnings		160.20			156.00
Total liabilities and stockholders’ equity	$	328.20		$	289.00

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

Sales	$	800.00
Cost of goods sold		480.00
Gross margin		320.00
Selling and administrative expenses		300.00
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

Carmono company
Cash Flow Statement
For this year ended
Cash Flow from Operating Activities:
Net Income		$               20.00
Add: Adjustments
Profit on sale of Equipment
Depreciation expense	$             11.20
Increase in Accounts Payables	$                9.00
Increase in Accounts receivables	$             (7.00)
Increase in Inventory	$           (13.40)
		$               (0.20)
A. Cash Flow from Operating Activities		$               19.80
Cash Flow from Investing Activities:
Purchase of Equipment	$           (36.00)
B. Cash flow from Investing Activities		$           (36.00)
Cash Flow from Financing Activities:
Issue of Common Stock	$             26.00
Dividend paid	$           (15.80)
C. Cash Flow from Financing Activities		$               10.20
Increase (Decrease) in cash [A+B+C]		$               (6.00)
Add: cash at the beginning of the year		$               13.00
Cash at the end of the year		$                 7.00

Calculation of Dividend paid
Opening Balance of Retained earnings	$      156.00
Add: Profits during period	$        20.00
	176.00
Less:Closing balance of Retained Earnings	$      160.20
Dividends Paid	$        15.80

Free Cash Flow

Operating Cash flow - Cash used in Investing Activities

($ 19.80-36)

$ (16.20)