Question

Problem 13-10 Prepare a Statement of Cash Flows; Free Cash Flow [LO13-1, LO13-2, LO13-3]

Joyner Company’s income statement for Year 2 follows:

Sales	$	705,000
Cost of goods sold		208,000
Gross margin		497,000
Selling and administrative expenses		217,000
Net operating income		280,000
Nonoperating items:
Gain on sale of equipment		7,000
Income before taxes		287,000
Income taxes		114,800
Net income	$	172,200

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	122,800		$	63,500
Accounts receivable		265,000			133,000
Inventory		319,000			271,000
Prepaid expenses		10,000			20,000
Total current assets		716,800			487,500
Property, plant, and equipment		625,000			513,000
Less accumulated depreciation		166,600			130,500
Net property, plant, and equipment		458,400			382,500
Loan to Hymans Company		47,000			0
Total assets	$	1,222,200		$	870,000
Liabilities and Stockholders' Equity
Accounts payable	$	319,000		$	253,000
Accrued liabilities		47,000			59,000
Income taxes payable		85,100			80,000
Total current liabilities		451,100			392,000
Bonds payable		194,000			103,000
Total liabilities		645,100			495,000
Common stock		344,000			282,000
Retained earnings		233,100			93,000
Total stockholders' equity		577,100			375,000
Total liabilities and stockholders' equity	$	1,222,200		$	870,000

Equipment that had cost $31,200 and on which there was accumulated depreciation of $11,200 was sold during Year 2 for $27,000. 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

ans 1		Year 2
Statement of cash flow
Cash flows from operating activities
Net income		$172,200
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expenses   166600-(130500-11200)	47300
Gain on sale of equipment	-7000
Increase in Accounts receivable	-132000
Increase in Inventory	-48000
Increase in Accounts Payable	66000
Decrease in Accured liabilities	-12000
Increase in Income tax payable	5100
		-80600
Net cash from operating activities		91600
ans 2
Statement of cash flow
Cash flows from operating activities
Net income		$172,200
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expenses   166600-(130500-11200)	47300
Gain on sale of equipment	-7000
Increase in Accounts receivable	-132000
Increase in Inventory	-48000
Increase in Accounts Payable	66000
Decrease in Accured liabilities	-12000
Increase in Income tax payable	5100
		-80600
Net cash from operating activities		91600
Cash flows from investing activities
Purchase of equipment (513000-31200)-625000	-143200
Loan to Hymas company	-47000
Sale of equipment	27000
		-163200
Net cash used investing activities		(163,200.00)
Cash flows from financing activities
Borrowing of bonds payable	91,000.00
Issuance of common stock	62,000.00
Payment of Cash Dividend 233100-(93000+172200)	-32100
		120,900.00
Net cash used financing activitie		120,900.00
Net Increase in cash and cash equivalents		49,300.00
Cash and cash equivalents at beginning of period		63,500.00
Ending Balance		112,800.00
ans 3
Free cash flow=Net cash from operating activities-Capital expenditure
91600-143200	-51600
It’s a negative free cash flow
If any doubt please comment