Question

Presented below is a condensed version of the comparative balance sheets for Zubin Mehta Corporation for the last two years at December 31.

	2017	2016
Cash	\(177,000	\)78,000
Accounts receivables	180,000	185,000
Investment	52,000	74,000
Equipment	298,000	240,000
Accumulated depreciation	(106,000)	(89,000)
Current liabilities	134,000	151,000
Common stock	160,000	160,000
Retained earnings	307,000	177,000

Additional information:

Investments were sold at a loss of \(10,000; no equipment was sold; cash dividends paid were \)30,000; and net income was $160,000.

Instructions

(a) Prepare a statement of cash flows for 2017 for Zubin Mehta Corporation.

(b) Determine Zubin Mehta Corporation’s free cash flow.

Short answer

The free cash flow of the business entity is$87,000.

Step-by-step solution

Definition of Retained Earnings

Earnings of the business entity held for some re-investment in the future period or to distribute as dividend to the shareholders is known as retained earnings.

Statement of cash flow

Particular	Amount $	Amount $
Cash flow from operations
Net income	$160,000
Add or less: Adjustments to net income
Depreciation expenses	17,000
Loss on sale of investment	10,000
Decrease in accounts receivables	5,000
Decrease in current liabilities	(17,000)
Cash flow from operations		$175,000
Cash flow from investing activities
Sale of investment	12,000
Purchase of equipment	(58,000)
Cash flow used in investing activity		(46,000)
Cash flow from financing activities		0
Cash dividend	(30,000)
Cash flow used in financing activities		(30,000)
Net increase or decrease in cash		99,000
Add: Opening cash Balance		78,000
Ending Cash Balance		$177,000

Statement of free cash flow

Particular	Amount $
Cash flow from operations	$175,000
Less: Capital expenditure	(58,000)
Less: Dividend	(30,000)
Free Cash Flow	$87,000