Question

Exercise 12-6 Prepare a Statement of Cash Flows; Free Cash Flow [LO12-1, LO12-2, LO12-3]

Comparative financial statement data for Carmono Company follow:

	This Year		Last Year
Assets
Cash	$	7.50	$	14.00
Accounts receivable		50.00		43.00
Inventory		92.50		79.20
Total current assets		150.00		136.20
Property, plant, and equipment		231.00		194.00
Less accumulated depreciation		45.60		34.20
Net property, plant, and equipment		185.40		159.80
Total assets	$	335.40	$	296.00
Liabilities and Stockholders’ Equity
Accounts payable	$	55.50	$	46.00
Common stock		118.00		91.00
Retained earnings		161.90		159.00
Total liabilities and stockholders’ equity	$	335.40	$	296.00

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

Sales	$	850.00
Cost of goods sold		510.00
Gross margin		340.00
Selling and administrative expenses		320.00
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. (List any deduction in cash and cash outflows as negative amounts. Round your intermediate calculations and final answers to 2 decimal places.) 2. Compute Carmono’s free cash flow for this year. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.)

Answer 1

Answer - 1 Statement of cash flows for this year
Cash Flows from Operating Activities
Net Income	20.00
Add Expenses Not Requiring Cash:
Depreciation	11.40
Other Adjustments:
Subtract Increase in Accounts Receivable	-7.00
Add increase in Accounts Payable	9.50
Subtract Increase in Inventory	-13.30
Net Cash from Operating Activities	20.60
Cash Flows from Investing Activities
Purchase of New Equipment	-37.00
Net Cash Used for Investing Activities	-37.00
Cash Flows from Financing Activities
Issue of common stock	27.00
Dividend	-17.10	Note: Net income - increase in reserve during the year i.e. (20-2.9)
Net Cash from Financing Activities	9.90
NET INCREASE/(DECREASE) IN CASH	-6.50
CASH, BEGINNING OF YEAR	14.00
CASH, END OF YEAR	7.50

Answer - 2

Carmono’s free cash flow for this year
FCF = Operating Cash Flow - Capital Expenditures
Cash Flows from Operating Activities	20.6
Subtract: Fixed Capital investment	-37
FCF	-16.4