Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	715,000
Cost of goods sold		182,000
Gross margin		533,000
Selling and administrative expenses		218,000
Net operating income		315,000
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		323,000
Income taxes		129,200
Net income	$	193,800

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	143,500		$	91,000
Accounts receivable		274,000			123,000
Inventory		320,000			274,000
Prepaid expenses		8,000			16,000
Total current assets		745,500			504,000
Property, plant, and equipment		631,000			507,000
Less accumulated depreciation		166,800			130,200
Net property, plant, and equipment		464,200			376,800
Loan to Hymans Company		42,000			0
Total assets	$	1,251,700		$	880,800
Liabilities and Stockholders' Equity
Accounts payable	$	313,000		$	260,000
Accrued liabilities		48,000			56,000
Income taxes payable		85,800			81,800
Total current liabilities		446,800			397,800
Bonds payable		209,000			115,000
Total liabilities		655,800			512,800
Common stock		345,000			276,000
Retained earnings		250,900			92,000
Total stockholders' equity		595,900			368,000
Total liabilities and stockholders' equity	$	1,251,700		$	880,800

Equipment that had cost $31,100 and on which there was accumulated depreciation of $11,100 was sold during Year 2 for $28,000. 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

Amount $ Amount $ 1,93,800 Joyner Company Cashflow Statement using Indirect method for year 2: Particulars Cash Flows From Operating Activities: Net Income Adjustments to Reconcile Net Income to Net Cash Provided by operations : Add: Depreciation Expense (166800-(130200-11100)) Less: Gain on sale of Equipment Changes in Working Capital :- Less: Increase in Accounts receivable (274000-123000) Less: Increase in Inventory (320000-274000) Add: Decrease in Prepaid expenses (16000-8000) Add: Increase in Accounts Payable (313000-260000) Less: Decrease in Accrued liabilities (56000-48000) 47,700 (8,000) (1,51,000) (46,000) 8,000 53,000 (8,000) 4,000 Add: Increase in Income taxes Payable (85800-81800) (1,00,300) 93,500 Cashflow from Operating Activities 28,000 Cash Flows From Investing Activities: Cash received from sale of Equipment Cash paid for purchase of Property, Plant and Equipment (631000-(507000-31100) Cash paid for Loan to Hymans company Change in cash due to Investing Activties (1,55,100) (42,000) (1,69,100) Cash Flows From Financing Cash paid for Dividends (92000+193800)-250900) Cash received from issue of Bonds Payable (209000-115000) Cash received from issue of Common stock (345000-276000) (34,900) 94,000 69,000 Change in cash due to Financing Net Changes in Cashflow from all activities Cash at the beginning of the year Cash at the end of the year 1,28,100 52,500 91,000 1,43,500 Net cash provided by/used in operating activities for year 2 is $ 93,500/. Free cash flow is = Cash from operating activities - Capital expenditure Free cash flow is = (93500-155100) Free cash flow is =- $ 61,600/.