Question

Presented below are the financial statements of Pearl Industries.

Pearl Industries Comparative Balance Sheets December 31
Assets		2017			2016
Cash		$ 123,200			$ 70,400
Accounts receivable		70,400			49,280
Inventory		98,560			70,400
Property, plant, and equipment		211,200			274,560
Accumulated depreciation		( 112,640	)		( 84,480	)
Total		$ 390,720			$ 380,160
Liabilities and Stockholders’ Equity
Accounts payable		$ 66,880			$ 52,800
Income taxes payable		24,640			28,160
Bonds payable		59,840			116,160
Common stock		63,360			49,280
Retained earnings		176,000			133,760
Total		$ 390,720			$ 380,160

Pearl Industries Income Statement For the Year Ended December 31, 2017
Sales revenue				$ 851,840
Cost of goods sold				616,000
Gross profit				235,840
Selling expenses		$ 63,360
Administrative expenses		21,120		84,480
Income from operations				151,360
Interest expense				10,560
Income before income taxes				140,800
Income tax expense				28,160
Net income				$ 112,640

Additional data:

1.		Depreciation expense was $ 61,600.
2.		Dividends declared and paid were $ 70,400.
3.		During the year equipment was sold for $ 29,920 cash. This equipment cost $ 63,360 originally and had accumulated depreciation of $ 33,440 at the time of sale.

Further analysis reveals the following.

1.		Accounts payable pertain to merchandise suppliers.
2.		All operating expenses except for depreciation were paid in cash.
3.		All depreciation expense is in the selling expense category.
4.		All sales and purchases are on account.

1) Prepare a statement of cash flows for Pearl Industries using the direct method.

Pearl Industries Statement of Cash Flows

2) Compute free cash flow

Free cash flow

$

Answer 1

Solution 1:

Computation of cash received from customers
Particulars	Amount
Beginning accounts receivables	$49,280.00
Add: Revenues	$851,840.00
Less: Ending accounts receivables	$70,400.00
Cash received from customers	$830,720.00

Computation of cash paid for inventory
Particulars	Amount
Cost of Goods Sold	$616,000.00
Add: Ending inventory	$98,560.00
Less: Beginning inventory	$70,400.00
Purchases made during the year	$644,160.00
Add: Opening accounts payable	$52,800.00
Less: Ending accounts payable	$66,880.00
Cash paid to supplier for inventory	$630,080.00

Computation of cash paid for Operating expenses
Particulars	Amount
Operating expenses	$84,480.00
Less: Depreciation	$61,600.00
Cash paid for operating expenses	$22,880.00

Computation of cash paid for Income Tax
Particulars	Amount
Income tax expense	$28,160.00
Add: Beginning income tax Payable	$28,160.00
Less: Ending income tax payable	$24,640.00
Cash paid for income tax	$31,680.00

Pearl Industries
Statement of Cash Flows (Direct Method)
For Year Ended December 31, 2017
Particulars	Details	Amount
Cash Flows from operating activities:
Cash received from customers	$830,720.00
Less: Cash disbursement:
Cash paid to supplier for inventory	-$630,080.00
Cash paid for operating expenses	-$22,880.00
Cash paid for interest	-$10,560.00
Cash paid for income tax	-$31,680.00
Net Cash provided by operating activities		$135,520.00
Cash flow from investing activities:
Proceed from sale of equipment	$29,920.00
Net Cash used in investing activities		$29,920.00
Cash flow from financing activities:
Bond repayment	-$56,320.00
Cash paid for dividends	-$70,400.00
Proceed from issue of common stock	$14,080.00
Net Cash used in financing activities		-$112,640.00
Net Increase (Decrease) in Cash		$52,800.00
Cash balance at beginning of year		$70,400.00
Cash balance at end of year		$123,200.00

Solution 2:

Free cash flow = Cash flow from operating activities - Capital expenditure = $135,520 - 0 = $135,520