Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	718,000
Cost of goods sold		230,000
Gross margin		488,000
Selling and administrative expenses		218,000
Net operating income		270,000
Nonoperating items:
Gain on sale of equipment		7,000
Income before taxes		277,000
Income taxes		83,100
Net income	$	193,900

Its balance sheet amounts at the end of Years 1 and 2 are as follows:

	Year 2			Year 1
Assets
Cash and cash equivalents	$	123,100		$	43,500
Accounts receivable		260,000			148,000
Inventory		320,000			272,000
Prepaid expenses		10,000			20,000
Total current assets		713,100			483,500
Property, plant, and equipment		636,000			518,000
Less accumulated depreciation		166,100			130,200
Net property, plant, and equipment		469,900			387,800
Loan to Hymans Company		46,000			0
Total assets	$	1,229,000		$	871,300
Liabilities and Stockholders' Equity
Accounts payable	$	316,000		$	256,000
Accrued liabilities		47,000			56,000
Income taxes payable		85,400			81,300
Total current liabilities		448,400			393,300
Bonds payable		192,000			110,000
Total liabilities		640,400			503,300
Common stock		333,000			273,000
Retained earnings		255,600			95,000
Total stockholders' equity		588,600			368,000
Total liabilities and stockholders' equity	$	1,229,000		$	871,300

Equipment that had cost $30,400 and on which there was accumulated depreciation of $12,000 was sold during Year 2 for $25,400. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for Year 2.

2. Prepare a statement of cash flows for Year 2.

3. Compute the free cash flow for Year 2.

Answer 1

193,900 Joyner Company Statement of Cash flows - Indirect Method (Partial) Cash flows from Operating Activities: Net income $ Adjustments to reconcile Net Income to Net Cash Provided by Operating activities Depreciation expenses $ 47,900 Gain on sale of Equipment S (7.000) Increase in accounts Receivables $ (112,000) Increase in Inventory $ (48,000) Decrease in Prepaid Expenses $ 10,000 Increase in accounts Payable $ 60,000 Decrease in accured liabilities S (9.000) Increase in Income taxes payable S 4.100 S Net Cash flow from operating activities $ (54,000) 139,900

$ 139,900 $ S S 25,400 (148,400 (46.000) Joyner Company Statement of Cash flows For Year 2 Operating activities Net Cash flow from operating activities Investing Activities Sale of Equipment Purchase of equipment Loan to Hymans Company Net Cash flow from Investing activities Financing Activities Issuance of Bonds payable Issuance of Common stock Cash Dividends paid Net Cash flow from Financing activities Net Increase in Cash Beginning cash and Cash equivalents Ending cash and Cash equivalents S (169,000) S $ S 82,000 60,000 (33.300) S $ S $ 108.700 79,600 43,500 123,100

3 Free Cash Flow for Year 2 S (41,800) Amount(S) Amount(S) $ 139,900 Computation of Free Cash Flow Particulars Net Cash flow from operating activities Less: capital Expenditures Cash Dividends paid $ (148.400) $ (33,300) S (181,700) $ (41.800) Free Cash flow