Question

"Exercise 14-3 Calculating Free Cash Flow Special instructions: The equation for Free Cash Flow is found on page 703 of your text. Complete this exercise on this document. There is space after the requirement. Apex Company prepared the statement of cash flows for the current year that is shown below: Apex Company Statement of Cash Flows—Indirect Method Operating activities Net income $40,000 Adjustments to convert net income to cash basis: Depreciation $22,000 Increase in accounts receivable (60,000) Increase in inventory (25,000) Decrease in prepaid expenses 9,000 Increase in accounts payable 55,000 Decrease in accrued liabilities (12,000) Increase in income taxes payable 5,000 (6,000) Net cash provided by (used in) operating activities 34,000 Investing activities Proceeds from the sale of equipment 14,000 Loan to Thomas Company (40,000) Additions to plant and equipment (110,000) Net cash provided by (used in) investing activities (136,000) Financing activities Increase in bonds payable 90,000 Increase in common stock 40,000 Cash dividends (30,000) Net cash provided by (used in) financing activities 100,000 Net decrease in cash and cash equivalents (2,000) Beginning cash and cash equivalents 27,000 Ending cash and cash equivalents $25,000 Required: Compute Apex Company’s free cash flow for the current year."

Answer 1

The free cash flow for Apex Company is calculated by subtracting capital expenditures ($110,000) and dividends paid ($30,000) from the net cash provided by operating activities ($34,000), resulting in a negative free cash flow of $106,000 for the current year.

Step-by-step explanation:

The student has asked to calculate the free cash flow for Apex Company. According to the information provided and using the indirect method, the free cash flow can be computed by starting with the net cash provided by operating activities and then subtracting capital expenditures and dividends paid. The formula is as follows:

Free Cash Flow = Net Cash Provided by Operating Activities - Capital Expenditures - Dividends Paid

Using the data from the statement of cash flows:

• Net Cash Provided by Operating Activities = $34,000
• Capital Expenditures (from the Investing Activities, this is the Additions to plant and equipment) = $110,000
• Dividends Paid = $30,000

Now, we calculate the free cash flow:

Free Cash Flow = $34,000 - $110,000 - $30,000

Free Cash Flow = $34,000 - $140,000

Free Cash Flow = -$106,000

Therefore, Apex Company's free cash flow for the current year is negative $106,000.