Megenity Company's net income last year was $194,000. Changes in the company's balance sheet accounts for the year appear below: The company declared and paid cash dividends of $132,000 last year. The following questions pertain to the company's statement of cash flows.
-No plant and equipment was disposed of during the year. The free cash flow for the year was:
A) $248,000
B) $116,000
C) $161,000
D) $470,000

Question

Megenity Company's net income last year was $194,000. Changes in the company's balance sheet accounts for the year appear below:  The company declared and paid cash dividends of $132,000 last year. The following questions pertain to the company's statement of cash flows.
-No plant and equipment was disposed of during the year. The free cash flow for the year was:
A) $248,000 
B) $116,000 
C) $161,000 
D) $470,000

Quizplus · Accepted Answer

Free cash flow is calculated as: 
Net cash provided by operating activities - capital expenditures 
Using the information provided in the changes of balance sheet accounts, we can calculate the net increase/decrease in operating assets and liabilities:

Accounts Receivable: -$13,000 
Inventory: +$17,000 
Prepaid expenses: -$3,000 
Accounts payable: +$11,000 
Accrued expenses: +$9,000

Net increase in operating assets and liabilities = +$21,000

The statement tells us there were no disposals of property and equipment during the year, so we can assume capital expenditures were equal to the change in the property and equipment account:

Property and Equipment: +$95,000

Therefore, free cash flow = 
$194,000 + $13,000 - $17,000 + $3,000 - $11,000 - $9,000 - $95,000 = $116,000

Megenity Company's Net Income Last Year Was $194,000