Question

Comparative financial statement data for Carmono Company follow:

	This Year			Last Year
Assets
Cash	$	5.00		$	9.00
Accounts receivable		40.00			33.00
Inventory		80.00			66.20
Total current assets		125.00			108.20
Property, plant, and equipment		216.00			184.00
Less accumulated depreciation		41.60			31.20
Net property, plant, and equipment		174.40			152.80
Total assets	$	299.40		$	261.00
Liabilities and Stockholders’ Equity
Accounts payable	$	48.00		$	41.00
Common stock		98.00			76.00
Retained earnings		153.40			144.00
Total liabilities and stockholders’ equity	$	299.40		$	261.00

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

Sales	$	600.00
Cost of goods sold		360.00
Gross margin		240.00
Selling and administrative expenses		220.00
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

Solution 1:

Carmono Company
Statement of Cash Flows
For This Year
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$20.00
Adjustments to reconcile net income to net cash provided by operations:
Depreciation Expense ($41.60 - $31.20)	$10.40
Increase in accounts receivables ($40 - $33)	-$7.00
Increase in inventory ($80 - $66.20)	-$13.80
Increase in accounts payable ($48 - $41)	$7.00
Net Cash provided by operating activities		$16.60
Cash Flow from Investing Activities:
Purchase of Property, Plant and Equipment ($216 - $184)	-$32.00
Net Cash Provided by Investing activities		-$32.00
Cash Flow from Financing Activities:
Proceed from issue of common stock ($98- $76)	$22.00
Dividend Paid ($144 + $20 - $153.40)	-$10.60
Net Cash Provided by financing activities		$11.40
Net Increase / (Decrease) in Cash		-$4.00
Cash balance at beginning of year		$9.00
Cash balance at end of year		$5.00

Solution 2:

Free cash flow = Operating cash flow - Capital expenditure = $16.60 - $32 = -$15.40