Q12BE. - Intermediate Accounting (Kieso)

Question

Keyser Beverage Company reported the following items in the most recent year. 

Net income $40,000 

Dividends paid 5,000 

Increase in accounts receivable 10,000 

Increase in accounts payable 7,000 

Purchase of equipment (capital expenditure) 8,000 

Depreciation expense 4,000 

Issue of notes payable 20,000 

Compute net cash provided by operating activities, the net change in cash during the year, and free cash flow.

Step-by-Step Solution

Answer

The Free Cash flow of the business entity is $28,000.

Definition of Notes Payable

The liability account reflects the amount borrowed by the business entity through a written promise to repay in a future period along with accrued interest.

Cashflow from the operation and net changes in the cash

Particular	Amount $
Net income	$40,000
Add or less: adjustments to net income
Depreciation expenses	4,000
Increase in accounts receivables	(10,000)
Increase in account payable	7,000
Cash flow from operating activities	$41,000
Investing activities:
Purchase of equipment	(8,000)
Financing activities:
Issue of notes payable	20,000
Dividend paid	(5,000)
Net increase in cash during the year	$48,000

Free Cashflow

Particular	Amount $
Cash flow from operating activities	$41,000
Less: Capital expenditure	(8,000)
Less: Dividend paid	(5,000)
Free Cash Flow	$28,000