Question

Preparing the statement of cash flows—indirect method, evaluating cash flows, and measuring free cash flows

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

2018 2017 Current Assets: Cash \( 83,900 \) 20,500 Accounts Receivable 14,500 21,800 Merchandise Inventory 61,800 60,400 Current Liabilities: Accounts Payable 29,600 28,100 Accrued Liabilities 10,500 11,900 Robeson’s transactions during 2018 included the following:

Payment of cash dividends \( 21,200

Depreciation expense \) 17,400

Purchase of equipment with cash 54,400

Purchase of building with cash 103,000

Issuance of long-term notes payable to borrow cash 44,000

Net income 63,600

Issuance of common stock for cash 111,000

Requirements

1. Prepare the statement of cash flows of Robeson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.

2. Evaluate Robeson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.

3. If Robeson plans similar activity for 2018, what is its expected free cash flow?

Short answer

Answer

1. Cash flow statement given below.

2. Given below

3. Expected free cash flow will be $(70,400)

Step-by-step solution

Statement of cash flows using the indirect method

Robeson Educational Supply Statement of Cash Flows For the year ended December 31, 2018
Cash Flows From Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Net Income	$63,600
Depreciation expense	$17,400
Decrease in account receivables	$7,300
Increase in merchandise inventory	($1,400)
Increase in account payable	$1,500
Decrease in accrued liabilities	($1,400)
Net cash provided/ (used) in operating activities	$87,000
Cash Flows From Investing Activities:
Purchase of equipment	($54,400)
Purchase of building	($103,000)
Net cash provided/ (used) in investing activities	($157,400)
Cash Flows From Financing Activities:
Issuance of common stock	$111,000
Issuance of notes payable	$44,000
Dividend paid	($21,200)
Net cash provided/ (used) in financing activities	$133,800
Net increase/(Decrease) in cash	$63,400
Cash Balance, December 31, 2017	$20,500
Cash Balance, December 31, 2018	$83,900

Evaluation of all three categories of cash flows.

Particulars	Amount	Reason
Net cash provided/ (used) in operating activities	$87,000	Cash receipts are more than payments
Net cash provided/ (used) in investing activities	($157,400)	Cash receipts are less than payments
Net cash provided/ (used) in financing activities	$133,800	Cash receipts are more than payments

Calculation of free cash flows.

Free cash flow = Net cash provided by operating activities – Capital expenditure =$87,000 - $157,400

= -$70,400