Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	713,000
Cost of goods sold		287,000
Gross margin		426,000
Selling and administrative expenses		218,000
Net operating income		208,000
Nonoperating items:
Gain on sale of equipment		5,000
Income before taxes		213,000
Income taxes		85,200
Net income	$	127,800

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

	Year 2			Year 1
Assets
Cash	$	54,600		$	45,900
Accounts receivable		276,000			135,000
Inventory		320,000			287,000
Prepaid expenses		9,000			18,000
Total current assets		659,600			485,900
Property, plant, and equipment		636,000			510,000
Less accumulated depreciation		166,800			131,600
Net property, plant, and equipment		469,200			378,400
Loan to Hymans Company		44,000			0
Total assets	$	1,172,800		$	864,300
Liabilities and Stockholders' Equity
Accounts payable	$	314,000		$	262,000
Accrued liabilities		45,000			53,000
Income taxes payable		85,900			80,300
Total current liabilities		444,900			395,300
Bonds payable		207,000			108,000
Total liabilities		651,900			503,300
Common stock		333,000			270,000
Retained earnings		187,900			91,000
Total stockholders' equity		520,900			361,000
Total liabilities and stockholders' equity	$	1,172,800		$	864,300

Equipment that had cost $30,200 and on which there was accumulated depreciation of $10,700 was sold during Year 2 for $24,500. 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.

Prepare a statement of cash flows for Year 2. (List any deduction in cash and cash outflows as negative amounts.)

	Joyner Company Statement of Cash Flows For Year 2 Operating activities: Investing activities: 0 Financing activities: 0 0 Beginning cash and cash equivalents Ending cash and cash equivalents $0

• Compute the free cash flow for Year 2. (Negative amount should be indicated by a minus sign.)

  	Free cash flow

Answer 1

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

In question 1 we have been asked to work out cash flow from operating activities through indirect method. The cash flow from Indirect method begins with Net Operating Income and then adjustment needs to be provided for non-cash and non-operating item.

There is sale of equipment whose original cost is 30200 & accumulated depreciation in year-1 is 10700 which is sold in year-2. As a result of this transaction the accumulated depreciation of Year1 will get reduced by 10700 and reach to 120900. The current year depreciation would be Year 2 depreciation - Year1 adjusted depreciation 45900 (166800-120900)

In the given set of facts we have depreciation as non-cash and gain on sale of equipment as non-operating. The

Thereafter under indirect method we need to we need to work out cash flow through increase / decrease in current assets and liabilities which provides below result :

Joyner Company
Statement of Cash Flows
For Year 2
Cash Flow (Indirect Method) for Year2 of Joiner Company	Amount	Amount
Net Operating Income		127,800
Adjustments
Gain on sale of equipment	-5,000
Depreciation	45,900	40,900
Increase / Decrease in Account Receivables	-141,000
Increase / Decrease in Inventory	-33,000
Increase / Decrease in Prepaid Expenses	9,000
Increase / Decrease Accounts payable	52,000
Increase / Decrease Accrued liabilities	-8,000
Increase / Decrease Income taxes payable	5,600	-115,400
Cash generated from Operations / Operating activities		53,300

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

We have been provided format of cash flow & need to prepare cash flow in same format. We already have cash generated from Operation / operating activity which is starting point of format.

Thereafter we need to work-out cash flow from investing activity and financing activity. This can be built from comparing Year2 & Year 1 balance sheet items. For investing activities we needs to compare increase in fixed asset after giving impact of sale of equipment as this is changing the year-1 original cost of equipment. The original cost of sold equipment was 30200 hence adjusted Year1 original cost of equipment will be 479800. The investment in fixed asset is 156200 (636000 (Year 2 Original cost) - 479800 (Year1 adjusted original cost)

While for financing activity we need to compare Loan advance given / taken and increase in common stock. There is one important point that when you add current year profit to year-1 retained earning we do not get Year-2 retained earning which imply that the differential amount is dividend payout.

Following is Cash flow Statement in the given format :

Joyner Company
Statement of Cash Flows
For Year 2
Cash generated from Operations / Operating activities		53,300
Cash Flow from Investing Activities
Purchase of Property, plant, and equipment	-156200
Proceed from sale of equipment	24500	-131700
Cash Flow from financing activities
Loan to Hymans Company	-44,000
Issuance of bonds payable	99000
Issue of Common Stock	63,000
Dividend Paid	-30,900	87,100
Net Increase in cash & cash equivalent		8,700
Cash & Cash equivalent at beginning of the year	45,900
Cash & Cash equivalent at end of the year	54,600

Q.3 Compute the free cash flow for Year 2

Free Cash Flow refers to Cash flow from operating activities needs to be reduced by amount spend on operating capital expenditure

In mathematical terms :

Free Cash Flow = Cash flow from Operating Activities - Purchase of Fixed Asset

-102,900 =53,300 - 156,200 (Sourced from cash flow prepared under Q.2)

Therefore free cash flow is - 102,900

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