Question

The comparative balance sheet of Jackson Educational Supply at December 31, 2018, reported the following:

	2018	2017
Current		Assets:
Cash	\( 87,700	\) 23,500
Accounts Receivable	15,300	22,000
Merchandise Inventory	62,600	60,400
Current		Liabilities:
Accounts Payable	28,100	26,100
Accrued Liabilities	10,600	11,300

Jackson’s transactions during 2018 included the following:

Payment of cash dividends \( 16,200

Depreciation expense \) 16,700

Purchase of equipment with cash 54,700

Purchase of building with cash 98,000

Issuance of long-term notes payable to borrow cash 48,000

Net income 57,600

Issuance of common stock for cash 105,000

Requirements

1. Prepare the statement of cash flows of Jackson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.
2. Evaluate Jackson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
3. If Jackson plans similar activity for 2019, what is its expected free cash flow?

Short answer

1. Net cash from operating activities is $80,100
2. Net cash flow for the year is $64,200.
3. The expected free cash flow will be -$88,800.

Step-by-step solution

Statement of cash flows using the indirect method

Jackson Educational Supply Statement of Cash Flows For the year ended December 31, 2018
Cash Flows From Operating Activities:
Net Income	$57,600
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation expense	$16,700
Decrease in account receivables ($22,000-$15,300)	$6,700
Increase in merchandise inventory ($62,600-$60,400)	($2,200)
Increase in account payable ($28,100 - $26,100)	$2,000
Decrease in accrued liabilities ($11,600-$10,300)	($700)
Net cash provided/ (used) in operating activities	$80,100
Cash Flows From Investing Activities:
Purchase of equipment	($54,700)
Purchase of building	($98,000)
Net cash provided/ (used) in investing activities	($152,700)
Cash Flows From Financing Activities:
Issuance of common stock	$105,000
Issuance of notes payable	$48,000
Dividend paid	($16,200)
Net cash provided/ (used) in financing activities	$136,800
Net increase/(Decrease) in cash	$64,200
Cash Balance, December 31, 2017	$23,500
Cash Balance, December 31, 2018	$87,700

Evaluation of all three categories of cash flows.

Particulars	Amount	Reason
Net cash provided/ (used) in operating activities	$80,100	When the core business activities flourishing and expenses gets minimal it leads to positive cash flow from operating activity.
Net cash provided/ (used) in investing activities	($152,700)	When the company invest in more PPE, financial instruments etc. it leads to higher cash outlay by which negative cash flow from investing activity arises.
Net cash provided/ (used) in financing activities	$136,800	When the company issues more securities or borrow money from bank and less dividend payments or repayable of the borrowings or loans etc. it leads to positive cash flow from financing activities.

Calculation of free cash flows.

$\begin{array}{c}\mathrm{Free}\mathrm{cash}\mathrm{flow}=\mathrm{Net}\mathrm{cash}\mathrm{provided}\mathrm{by}\mathrm{operating}\mathrm{activities}-\mathrm{Cash}\mathrm{payments}\mathrm{planned}\mathrm{for}\mathrm{investments}\mathrm{in}\mathrm{longterm}\mathrm{assets}-\mathrm{Cash}\mathrm{dividends}\\ =\mathrm{\$}80,100-\mathrm{\$}152,700-\mathrm{\$}16,200\\ =\left(\mathrm{\$}88,800\right)\end{array}$