Question

P17.5B: Presented below are the financial statements of Gaudette Company.

Prepare a cash flow statement—indirect method—and calculate free cash flow.

GAUDETTE COMPANY Balance Sheet December 31
Assets	2021	2020
Cash	$ 28,000	$ 33,000
Accounts receivable	23,000	14,000
Inventory	41,000	25,000
Equipment	70,000	78,000
Accumulated depreciation—equipment	(27,000)	(24,000)
Total	$135,000	$126,000
Liabilities and Shareholders' Equity
Accounts payable	$ 31,000	$ 43,000
Income taxes payable	26,000	20,000
Notes payable	20,000	10,000
Common shares	25,000	25,000
Retained earnings	33,000	28,000
Total	$135,000	$126,000

GAUDETTE COMPANY Income Statement For the Year Ended December 31, 2021
Sales		$286,000
Cost of goods sold		194,000
Gross profit		92,000
Selling expenses	$28,000
Administrative expenses	9,000	37,000
Profit from operations		55,000
Interest expense		7,000
Profit before income taxes		48,000
Income tax expense		10,000
Profit		$ 38,000

Additional information:

1. 1. Dividends of $33,000 were declared and paid. Gaudette reports under ASPE.

2. 2. During the year, equipment was sold for $10,000 cash. This equipment cost $13,000 originally and had a carrying value of $10,000 at the time of sale.

3. 3. All depreciation expense, $6,000, is in the selling expense category.

4. 4. All sales and purchases are on account.

5. 5. Additional equipment was purchased for $5,000 cash.

Instructions

a. Prepare a statement of cash flows using the indirect method.

b. Calculate free cash flow.

Taking It Further  Gaudette Company had a positive cash balance at the beginning and end of 2021. Given that, is it possible that the company could have had a negative cash balance at one or more points during the year? Explain.

Answer 1

Solution:

Calculation of free Cash flow:

Free Cash Flow = Cash Flow from Operation - Capital Expenditure - Dividend Paid

= $13,000 - $5,000 - $33,000

= $(25,000)