Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	718,000
Cost of goods sold		310,000
Gross margin		408,000
Selling and administrative expenses		218,000
Net operating income		190,000
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		198,000
Income taxes		59,400
Net income	$	138,600

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

	Year 2			Year 1
Assets
Cash	$	81,000		$	84,700
Accounts receivable		257,000			114,000
Inventory		319,000			283,000
Prepaid expenses		8,500			17,000
Total current assets		665,500			498,700
Property, plant, and equipment		629,000			500,000
Less accumulated depreciation		166,300			131,000
Net property, plant, and equipment		462,700			369,000
Loan to Hymans Company		46,000			0
Total assets	$	1,174,200		$	867,700
Liabilities and Stockholders' Equity
Accounts payable	$	314,000		$	252,000
Accrued liabilities		42,000			52,000
Income taxes payable		85,100			81,700
Total current liabilities		441,100			385,700
Bonds payable		203,000			116,000
Total liabilities		644,100			501,700
Common stock		333,000			275,000
Retained earnings		197,100			91,000
Total stockholders' equity		530,100			366,000
Total liabilities and stockholders' equity	$	1,174,200		$	867,700

Equipment that had cost $30,600 and on which there was accumulated depreciation of $10,600 was sold during Year 2 for $28,000. 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

1) Calculation of Net Cash Provided by Operating Activities (Amts in $)

Cash Flows from Operating Activities
Net Income		138,600
Adjustments to reconcile net income to operating cash flows
Less: Gain on sale of equipment	(8,000)
Add: Depreciation Expense (Working Note 1)	45,900
Less: Increase in Accounts Receivable (257,000-114,000)	(143,000)
Less: Increase in Inventory (319,000-283,000)	(36,000)
Add: Decrease in Prepaid Expenses (8,500-17,000)	8,500
Add: Increase in Accounts Payable (314,000-252,000)	62,000
Less: Decrease in Accrued Liabilities (42,000-52,000)	(10,000)
Add: Increase in Income Taxes Payable (85,100-81,700)	3,400	(77,200)
Net cash provided by operating activities		61,400

Working Note 1)

Calculation of depreciation expense for the year 2

Acc. dep in Beg+Dep. Exp for year 2-Acc. Dep on Equipment sold = Acc. Dep at the end

$131,000+Depreciation-$10,600 = $166,300

Depreciation = $166,300+$10,600-$131,000 = $45,900

2) Joyner Company

Statement of Cash Flows for Year 2 (Amts in $)

A) Operating Activities
Net cash provided by Operating activities (as calculated in part 1) (A)		61,400
B) Investing Activities
Sale of Equipment	28,000
Purchase of Equipment [629,000-(500,000-30,600)]	(159,600)
Loans to Hymans Company (46,000-0)	(46,000)
Net Cash Used in Investing Activities (B)		(177,600)
C) Financing Activities
Issue of Bonds Payable (203,000-116,000)	87,000
Isssue of Common Stock (333,000-275,000)	58,000
Dividends Paid (Beg. retained Earnings+Net Income-Ending Retained Earnings) (91,000+138,600-197,100)	(32,500)
Net cash provided by Financing Activities (C)		112,500
Net Increase/(Decrease) in Cash (A+B+C)		(3,700)
Add: Beginning Cash Balance		84,700
Ending Cash Balance (84,700-3,700)		81,000

3) Free Cash Flow = Cash Flows from Operating Activities-Cash Flows from Investing Activities

= $61,400 - $177,600 = -$116,200

Therefore free cash flows is negative (i.e. $116,200).