Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	702,000
Cost of goods sold		119,000
Gross margin		583,000
Selling and administrative expenses		150,600
Net operating income		432,400
Nonoperating items:
Gain on sale of equipment		6,000
Income before taxes		438,400
Income taxes		175,360
Net income	$	263,040

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	250,040		$	71,000
Accounts receivable		225,000			119,000
Inventory		319,000			284,000
Prepaid expenses		10,000			20,000
Total current assets		804,040			494,000
Property, plant, and equipment		623,000			516,000
Less accumulated depreciation		166,800			131,600
Net property, plant, and equipment		456,200			384,400
Loan to Hymans Company		41,000			0
Total assets	$	1,301,240		$	878,400
Liabilities and Stockholders' Equity
Accounts payable	$	312,000		$	269,000
Accrued liabilities		45,000			51,000
Income taxes payable		84,100			80,400
Total current liabilities		441,100			400,400
Bonds payable		203,000			105,000
Total liabilities		644,100			505,400
Common stock		333,000			278,000
Retained earnings		324,140			95,000
Total stockholders' equity		657,140			373,000
Total liabilities and stockholders' equity	$	1,301,240		$	878,400

Equipment that had cost $30,600 and on which there was accumulated depreciation of $11,500 was sold during Year 2 for $25,100. 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.

1

	Joyner Company Statement of Cash Flows—Indirect Method (partial) 0 $0

2

	Joyner Company Statement of Cash Flows For Year 2 Operating activities: Investing activities: 0 Financing activities: 0 0 Beginning cash and cash equivalents Ending cash and cash equivalents $0

3

	Free cash flow

Answer 1

1)	Net cash from operating activities
	net income for the year					263,040
	Adjustments to reconcile net income to
	cash from operating activities
	Depreciation expense					46,700
	gain on sale of Equipment					-6,000
	increase in accounts receivable					-106000
	increase in inventory					-35000
	decrease in prepaid expense					10000
	increase in accounts payable					43000
	decrease in accrued liabilities					-6000
	increase in income taxes payable					3700
	Net cash from operating activities					213,440
2)	net cash from operating activities						213,440
	Cash from investing activities
	cash from sale of Equipment					25,100
	purchase of plant					-137,600
	loan to Hymans company					-41,000
	net cash used by investing activities						-153,500
	cash from financing activities
	cash from bonds payable					98000
	Cash from common stock					55000
	dividends paid					-33,900
	net cash from financing activities						119,100
	net increase in cash						179,040
	cash at beginning						71,000
	Cash at year end						250,040
3)	Free cash flow
	net cash from operating activities-capital expenditure - dividends paid
	213440-137600-33900
	41940

Depreciation expense
closing balance -Accumulated depreciation					166,800
opening bal			131,600
less dep on sold equipment			11,500		120,100
Depreciation expense					46,700
purchase of plant
closing balance					623,000
opening			516000
sold during the year			30,600		485,400
purchase of plant					137,600
dividend
opening balance retained earnings					95,000
add net income					263,040
total					358,040
less closing balace					324140
dividend paid					33,900