Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	700,000
Cost of goods sold		207,000
Gross margin		493,000
Selling and administrative expenses		216,000
Net operating income		277,000
Nonoperating items:
Gain on sale of equipment		7,000
Income before taxes		284,000
Income taxes		113,600
Net income	$	170,400

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

	Year 2			Year 1
Assets
Cash	$	120,800		$	73,300
Accounts receivable		267,000			131,000
Inventory		319,000			276,000
Prepaid expenses		9,000			18,000
Total current assets		715,800			498,300
Property, plant, and equipment		632,000			511,000
Less accumulated depreciation		166,700			130,100
Net property, plant, and equipment		465,300			380,900
Loan to Hymans Company		47,000			0
Total assets	$	1,228,100		$	879,200
Liabilities and Stockholders' Equity
Accounts payable	$	320,000		$	267,000
Accrued liabilities		44,000			55,000
Income taxes payable		84,200			80,200
Total current liabilities		448,200			402,200
Bonds payable		198,000			101,000
Total liabilities		646,200			503,200
Common stock		347,000			280,000
Retained earnings		234,900			96,000
Total stockholders' equity		581,900			376,000
Total liabilities and stockholders' equity	$	1,228,100		$	879,200

Equipment that had cost $32,000 and on which there was accumulated depreciation of $10,600 was sold during Year 2 for $28,400. 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

1. In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation & deduct the gain on sale of equipment in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted. Before proceeding with the cash flow statement, we will check for certain adjustments given as below:

(a) Depreciation expense for year 2:

Accumulated Depreciation in Year 2 : $166700

Add: Accumulated depreciation of equipment sold : $10600

Less: Accumulated depreciation in year 1: ($130100)

Depreciation for year 2 : $47200

(b) Purchase of equipment:

Ending equipment (year 2, gross amount) : $632000

Add: Cost of the equipment sold : $32000

Less: Beginning equipment (year 1, gross amount):   ($511000)   

Purchase of equipment $153000

(c) Dividend paid:

Ending retained earnings ( in year 2) : $234900

Less: Net income : ($170400)

Less: Beginning retained earnings : ($96000)

Dividend paid : ($31500)

Statement of cash flows for year 2

Net income $170400

Add: Depreciation $47200

Less: Gain on sale of equipment ($7000)

Less: Increase in accounts receivable ($136000)

Less: Increase in inventory ($43000)

Add: Decrease in prepaid expenses $9000

Add: Increase in accounts payable $53000

Less: Decrease in accrued liability ($11000)

Add: Increase in income tax payable $4000

Cash from operating activities $86600

2. We will take cash from operating activities from above point (1)

Cash from operating activities $86600

Purchase of equipment ($153000)

Sale of equipment $28400

Loan to hymans company ($47000)

Cash from investing activities ($171600)

Dividends paid ($31500)

Proceeds from bonds payable $97000

Proceeds from common stock $67000

Cash from financing activities $132500

Net cash provided by operating

investing and financing activities $47500

Beginning cash balance $73300

Ending cash balance $120800

3. Free cash flows = Cash from operating activities - Capital expenditure

Cash from operating activities = $86600 (as calculated in point (1))

Capital expenditure = Equipment purchase = $153000

Free cash flows = $86600 - $153000 = ($66400)