Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	708,000
Cost of goods sold		399,000
Gross margin		309,000
Selling and administrative expenses		216,000
Net operating income		93,000
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		101,000
Income taxes		40,400
Net income	$	60,600

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	14,900		$	60,100
Accounts receivable		269,000			147,000
Inventory		320,000			285,000
Prepaid expenses		8,500			17,000
Total current assets		612,400			509,100
Property, plant, and equipment		625,000			505,000
Less accumulated depreciation		166,400			131,000
Net property, plant, and equipment		458,600			374,000
Loan to Hymans Company		45,000			0
Total assets	$	1,116,000		$	883,100
Liabilities and Stockholders' Equity
Accounts payable	$	314,000		$	250,000
Accrued liabilities		49,000			57,000
Income taxes payable		85,500			80,100
Total current liabilities		448,500			387,100
Bonds payable		204,000			118,000
Total liabilities		652,500			505,100
Common stock		336,000			279,000
Retained earnings		127,500			99,000
Total stockholders' equity		463,500			378,000
Total liabilities and stockholders' equity	$	1,116,000		$	883,100

Equipment that had cost $31,600 and on which there was accumulated depreciation of $10,200 was sold during Year 2 for $29,400. 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

Workings: Depreciation expense: Ending accumulated depreciation Less: Beginning accumulated depreciation Add: Accumulated depreciation on equipment sold Depreciation expense: $166,400 $131.000 $10,200 $45,600 $60.600 Joyner Company Statement of Cash Flows Indirect mathod (partial) Cash flows from operating activities Net Income Adjust to reconcile net income to Net cash provided by operating activities & change in working capital Depreciation Expenses Gain on sale of Equipment Increase in Accounts receivable Increase in Inventory Decrease in Prepaid expenses Increase in Accounts payable Decrease in Accrued liabilities Increase in Income tax payable $45,600 -$8.000 -S122.000 -$35.000 $8,500 $64.000 -$8,000 $5.400 Property, Plant, and equipment purchase: Ending Property. Plant, and equipment Less: Beginning Property. Plant, and equipment Add: Equipment sold Equipment purchased $625,000 $505,000 $31.600 $151,600 -$49,500 $11.100 Dividends : Beginning retained earnings Add: Net Income Less: Ending retained earnings $99,000 $60.600 $127.500 $32.100 Net cash Provided by operating activities Joyner Company Statement of Cash Flows For year 2 Operating activities: Net cash Provided by operating activities $11.100 Investing activities: Sale of equipment Purchase of Equipment loan to hymans company Net cash Provided by investing activities $29,400 -$151,600 -$45.000 -$167,200 Financing activities: Issue of Bonds payable Issued of common stock Payment of Dividends Net cash Provided by financing activities $86,000 $57,000 -$32.100 $110.900 Net cash procced Add: beginning cash and cash equivalent Ending cash and cash equivalent -$45,200 $60.100 $14,900 3) Compute the free cash flow for year 2. Free cash flow = Net cash provided by operating activities - Capital expenditures - Dividends = $11,100 - 151,600 - 32.100 = $172,600