Question

P1-34A Preparing the statement of cash flows-indirect method with non-cash transactions The 2016 income statement and comparative balance sheet of McKnight, Inc. follow: MCKNIGHT, INC. Income Statement Year Ended December 31, 2016 $ 441,000 Sales Revenue 202,200 Cost of Goods Sold 238,800 Gross Profit Operating Expenses: $ 76,400 Salaries Expense 14,200 Depreciation Expense-Plant Assets 10,500 Other Operating Expenses 101,100 Total Operating Expenses 137,700 Operating Income Other Revenues and (Expenses): 8,800 Interest Revenue (21,600) Interest Expense (12,800) Total Other Revenues and (Expenses) 124,900 Net Income Before Income Taxes 19,500 Income Tax Expense $ 105,400 Net Income

Answer 1

Answer 1:

MCKNIGHT, INC. Statement of Cash Flows For the year ended December 31, 2016 Cash flow from Operating Activities Net Income $105,400 Adjustments to reconcile net income to net cash from operating activities: Depreciation Expense Decrease (Increase) in Account Receivables Decrease (Increase) in Merchandise Inventory Increase (Decrease) in Accounts payables Increase (Decrease) in Accrued liabilities $14,200 -$1,500 $11,900 $4,600 -$1,900 $27,300 $132,700 Net Cash flows from Operating Activities Cash flow from Investing Activities Purchase of equipment Net Cash flows from investing activities $18,400 $18,400 Cash flow from Financing Activities Repayment of Long term notes payable Issue of common stock Payment of dividends Net Cash flows from financing activities -$60,800 $23,400 -$65,600 -$103,000 Net Increase (Decrease) in Cash $11,300 Cash at the beginning of the period Cash at the end of the period $15,100 $26,400 Non-cash investing and financing activities Purchase of land through issue of long-term notes payables $27,800

Working:

Dividend paid = 2300 + 105400 - 42100 = $65,600

We do not observe any gain/loss from sale of equipment. Hence the cost of equipment sold has to be equal to its accumulated depreciation.

Equipment purchased = 118510 + 10200 - 110310 = $18,400

Repayment of notes payable =106000 + 27800 - 73000 = $60,800

Answer 2:

We calculate free cash flows from an investment to evaluate investment.

From this problem we observe cash flow from operating activities is positive at $132,700 and net cash capex is $18,400.

We get positive free cash flows in this example which can be used to evaluate impact on valuation of the company.