Exercise 14-6 Prepare a Statement of Cash Flows; Free Cash Flow [LO14-1, LO14-2, LO14-3] Comparative financial statement data for Carmono Company follow: Assets Cash Accounts receivable Inventory Total current assets Property, plant, and equipment Less accumulated depreciation Net property, plant, and equipment. Total assets Liabilities and Stockholders Equity Accounts payable Common stock Retained earnings Total liabilities and stockholders' equity For this year, the company reported net income as follows: Sales Cost of goods sold Gross margin Selling and administrative expenses Net income $1,600.00 960.00 640.00 620.00 20.00 This Year $ $ 15.00 80.00 130.00 225.00 276.00 57.60 218.40 $443.40 $ 78.00 178.00 187.40 $443.40 Last Year $ 29.00 73.00 118.20 220.20 224.00 43.20 180.80 $401.00 $ 61.00 136.00 204.00 $401.00 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.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![Exercise 14-6 Prepare a Statement of Cash Flows; Free Cash Flow [LO14-1, LO14-2, LO14-3]
Comparative financial statement data for Carmono Company follow:
Assets
Cash
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment
Less accumulated depreciation
Net property, plant, and equipment
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Common stock
Retained earnings.
Total liabilities and stockholders' equity
For this year, the company reported net income as follows:
Sales
Cost of goods sold.
Gross margin
Selling and administrative expenses
Net income
$1,600.00
960.00
640.00
620.00
20.00
This Year
$
$ 15.00
80.00
130.00
225.00
276.00
57.60
218.40
$443.40
$ 78.00
178.00
187.40
$443.40
Last Year
$29.00
73.00
118.20
220.20
224.00
43.20
180.80
$401.00
$ 61.00
136.00
204.00
$401.00
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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4c56b099-7357-4403-a0fa-a5ad2827aea0%2Fe0b73382-2b47-4f25-9403-6eeebacad1d8%2Fcrq38d_processed.jpeg&w=3840&q=75)
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