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Chapter 14: Q14-14RQ (page 769)
Question: What is free cash flow, and how is it calculated?
Answer
Free cash flow is the cashavailable with the company for new opportunities.
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Classifying cash flow items Consider the following transactions:
Identify the category of the statement of cash flows in which each transaction would be reported.
Preparing the statement of cash flows—indirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Rolling Hills, Inc. follow:
Additionally, Rolling Hills purchased land of \(21,100 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset was $13,410. The plant acquisition was for cash.
Requirements
1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.
2. How will what you learned in this problem help you evaluate an investment?
Use the Rouse Exercise Equipment data in Exercises E14-23 and E14-24. Rouse plansto purchase a truck for \(23,000 and a forklift for \)125,000 next year. In addition, itplans to pay cash dividends of $3,500. Assuming Rouse plans similar activity for 2019,what would be the amount of free cash flow?
Classic Rare Coins (CRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, CRC issued no-par common stock for \(525,000.
b. Early in January, CRC made the following cash payments:
1. For store fixtures, \)51,000
2. For merchandise inventory, \(240,000
3. For rent expense on a store building, \)18,000
c. Later in the year, CRC purchased merchandise inventory on account for \(243,000. Before year-end, CRC paid \)153,000 of these accounts payable.
d. During 2018, CRC sold 2,800 units of merchandise inventory for \(325 each. Before year-end, the company collected 95% of this amount. Cost of goods sold for the year was \)290,000, and ending merchandise inventory totaled \(193,000.
e. The store employs three people. The combined annual payroll is \)82,000, of which CRC still owes \(5,000 at year-end.
f. At the end of the year, CRC paid income tax of \)17,000. There were no income taxes payable.
g. Late in 2018, CRC paid cash dividends of $38,000.
h. For store fixtures, CRC uses the straight-line depreciation method, over five years, with zero residual value.
Requirements
1. What is the purpose of the statement of cash flows?
2. Prepare CRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
3. Prepare CRC’s balance sheet at December 31, 2018.
4. Prepare CRC’s statement of cash flows using the indirect method for the year ended December 31, 2018.
Julie Lopez Company expects the following for 2018:
How much free cash flow does Lopez expect for 2018?
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