Question

oyner Company’s income statement for Year 2 follows:

Sales	$	718,000
Cost of goods sold		50,000
Gross margin		668,000
Selling and administrative expenses		217,000
Net operating income		451,000
Nonoperating items:
Gain on sale of equipment		5,000
Income before taxes		456,000
Income taxes		136,800
Net income	$	319,200

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

	Year 2			Year 1
Assets
Cash	$	254,300		$	55,900
Accounts receivable		252,000			118,000
Inventory		318,000			286,000
Prepaid expenses		10,000			20,000
Total current assets		834,300			479,900
Property, plant, and equipment		627,000			517,000
Less accumulated depreciation		166,600			131,300
Net property, plant, and equipment		460,400			385,700
Loan to Hymans Company		47,000			0
Total assets	$	1,341,700		$	865,600
Liabilities and Stockholders' Equity
Accounts payable	$	310,000		$	255,000
Accrued liabilities		42,000			52,000
Income taxes payable		84,900			81,600
Total current liabilities		436,900			388,600
Bonds payable		193,000			108,000
Total liabilities		629,900			496,600
Common stock		335,000			279,000
Retained earnings		376,800			90,000
Total stockholders' equity		711,800			369,000
Total liabilities and stockholders' equity	$	1,341,700		$	865,600

Equipment that had cost $31,800 and on which there was accumulated depreciation of $10,100 was sold during Year 2 for $26,700. 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.

Joyner Company
Statement of Cash flows
For Year 2
Cash flows from operating activities
Net Income		$ 319,200
Adjustments to reconcile net income to ;
Depreciation expense	$      45,400		166600-131300+10100
Gain on sale of equipment	$      (5,000)
Increase in accounts receivable	$ (134,000)
Increase in inventories	$   (32,000)
Decrease in prepaid expense	$      10,000
Increase in accounts payable	$      55,000
Decrease in accrued liabilities	$   (10,000)
Increase in income tax payable	$        3,300
		$ (67,300)
Net cash provided by operating activities		$ 251,900

2.

Joyner Company
Statement of Cash flows
For Year 2
Net cash provided by operating activities		$   251,900
Cash flows from investing activities
Cash paid for purchase of property, plant and equipment	$ (141,800)		517000-627000-31800
Cash received from sale of equipment	$      26,700
Loan given to Hymans Company	$   (47,000)
Net cash used by investing activities		$ (162,100)
Cash flows from financing activities
Cash paid for dividends	$   (32,400)		376800-319200-90000
Cash received from issuance of stock	$      56,000
Cash received from issuance of bonds	$      85,000
Net cash provided by financing activities		$   108,600
Net Increase in cash and cash equivalents		$   198,400
Cash and cash equivalents at beginning of period		$      55,900
Cash and cash equivalents at end of period		$   254,300

3.

Net cash provided by operating activities	$   251,900
Less: Capital expenditures	$ (141,800)
Less: Dividends	$   (32,400)
Free cash flow	$      77,700

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