Question

Holmes Company reported the following balance sheets at December 31, 2017 and 2018:

($ in millions)	December 31,
	2018				2017
Cash	$	45			$	40
Accounts receivable		170				175
Inventory		250				230
Fixed assets		500				400
Accumulated depreciation		(150	)			(120	)
Total assets	$	815			$	725
Accounts payable	$	100			$	80
Long-term debt		455				425
Common stock		50				50
Retained earnings		280				200
Treasury stock		(70	)			(30	)
Total liabilities and stockholders' equity	$	815			$	725

Its income statement for 2018 was as follows:

($ in millions)
Sales	$	1,000
Cost of sales		(670	)
Depreciation		(30	)
Other operating expenses		(100	)
Income before taxes		200
Income taxes		(70	)
Net income	$	130

Additional information:

During 2018, Holmes had the following transactions:

Declared and paid a common dividend of $50 million.

Purchased additional fixed assets, but did not sell any.

Issued $30 million of new debt.

Paid interest on all its debt, and included the interest in Other operating expenses.

Repurchased common shares, but did not issue any.

Required:

Prepare a cash flow statement for Holmes for 2018, using the indirect method to present the operating section. For your calculations, it may be helpful to use the worksheet approach described in the chapter appendix to construct the cash flow statement. (Net cash outflows and amounts to be deducted should be indicated by a minus sign.)

Answer 1

HOLMES COMPANY
Cash Flow Statement
For year ended 31st December 2018
($ In millions)
A. Cash Flows from Operating Activity
Net Income		$   130.00
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$        30.00
Changes in current operating assets and liabilities:
Increase in Accounts payables	$        20.00
Decrease in Accounts receivables	$           5.00
Increase in Inventory	$      (20.00)
		$     35.00
Net cash Provided by Operating activities		$   165.00
B. Cash flows from Investing Activities
Purchase of Fixed assets	$    (100.00)
Sale of Land
Net cash flow used for investing activities		$ (100.00)
C. Cash Flows from Financing activities
Proceeds from loan	$        30.00
Repurchase of common stock	$      (40.00)
Dividends paid	$      (50.00)
Cash flows provided by Financing activities		$   (60.00)
Net Increase (Decrease) in Cash [A+B+C]		$        5.00
Cash at the beginning		$     40.00
Cash at the end		$     45.00