Question

Exercise 13-6 Prepare a Statement of Cash Flows; Free Cash Flow [LO13-1, LO13-2, LO13-3]

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash and cash equivalents	$	3		$	6
Accounts receivable		22			24
Inventory		50			40
Total current assets		75			70
Property, plant, and equipment		240			200
Less accumulated depreciation		65			50
Net property, plant, and equipment		175			150
Total assets	$	250		$	220
Liabilities and Stockholders’ Equity
Accounts payable	$	40		$	36
Common stock		150			145
Retained earnings		60			39
Total liabilities and stockholders’ equity	$	250		$	220

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

Sales	$	275
Cost of goods sold		150
Gross margin		125
Selling and administrative expenses		90
Net income	$	35

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

Requirement 1:

Statement of Cash Flows
For Year Ended Dec 31, This year
Cash flows from operating activities:
Net income		$35
Adjustments to reconcile profit to net cash inflows from operating activities:
Depreciation Expense	$15
Decrease in accounts receivable	$2
Increase in inventory	($10)
Increase in accounts payable	$4	$11
Net cash flows provided(used) by operating activities (i)		$46
Cash flows from investing activities:
Purchase of property,plant and equipment	($40)
Net cash flows provided(used) by investing activities (ii)		($40)
Cash flows from financing activities:
Issuance of common stock	$5
Payment of cash dividends	($14)
Net cash flows provided (used) by financing activities (iii)		($9)
Net increase (decrease) in cash (i+ii+iii)		($3)
Cash and cash equivalents last year		$6
Cash and cash equivalents this year		$3

Calculations:

Retained earnings, Last year	$39
Net income	$35
Retained earnings, This year	($60)
Cash paid for dividends	$14

Requirement 2:

Cash flows from operating activities	$46
Capital expenditure	($40)
Free cash flows	$6