Chapter 12, Problem 12.7AP

 (a)

To determine

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.

• Deduct increase in current assets.
• Deduct decrease in current liabilities.
• Add decrease in current assets.
• Add the increase in current liability.
• Add depreciation expense and amortization expense.
• Add loss on sale of plant assets.
• Less gain on sale of plant assets.

Cash flow from investing activities: This section of cash flows statement provides information concerning about the purchase and sale of capital assets by the company.

• Deduct the amount of cash used to purchase any fixed assets.
• Add the amount of cash received from sale of any fixed asset.

Cash flow from financing activities: This section of cash flows statement provides information about the cash inflow and outflow as a result of issuance and financing of debt, issue of new stock and payment of dividends.

• Add the amount of cash received from any sources of finance.
• Deduct the amount of cash used for payment for dividend and interest from financing activities.
• Deduct the amount of cash used for payment of treasury stock from financing activities.

To Prepare: Statement of cash flows of W Company using indirect method.

(b)

To determine

Free cash flow: It describes the net cash provided from operating activities after making required adjustments for dividends and capital expenditures. In other words, it is the cash flow arrived after making payment for capital expenditures and dividend payments.

To Compute: Free cash flow of “N” Company.