Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	717,000
Cost of goods sold		208,000
Gross margin		509,000
Selling and administrative expenses		150,800
Net operating income		358,200
Nonoperating items:
Gain on sale of equipment		10,000
Income before taxes		368,200
Income taxes		110,460
Net income	$	257,740

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	234,640		$	52,500
Accounts receivable		229,000			150,000
Inventory		319,000			287,000
Prepaid expenses		8,500			17,000
Total current assets		791,140			506,500
Property, plant, and equipment		635,000			500,000
Less accumulated depreciation		166,100			130,100
Net property, plant, and equipment		468,900			369,900
Loan to Hymans Company		45,000			0
Total assets	$	1,305,040		$	876,400
Liabilities and Stockholders' Equity
Accounts payable	$	314,000		$	255,000
Accrued liabilities		45,000			53,000
Income taxes payable		84,100			81,400
Total current liabilities		443,100			389,400
Bonds payable		196,000			117,000
Total liabilities		639,100			506,400
Common stock		343,000			272,000
Retained earnings		322,940			98,000
Total stockholders' equity		665,940			370,000
Total liabilities and stockholders' equity	$	1,305,040		$	876,400

Equipment that had cost $30,500 and on which there was accumulated depreciation of $11,100 was sold during Year 2 for $29,400. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.

Compute the free cash flow for Year 2

Answer 1

Solution:

Joyner Company
Statement of Cash Flows (Partial)
For year 2
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$257,740.00
Adjustments to reconcile net income to net cash provided by operations:
Depreciation Expense ($166,100 - $130,100 + $11,100)	$47,100.00
Gain on sale of equipment	-$10,000.00
Increase in accounts receivables ($229,000 - $150,000)	-$79,000.00
Increase in inventory ($319,000 - $287,000)	-$32,000.00
Decrease in prepaid expenses ($17,000 - $8,500)	$8,500.00
Increase in accounts payable ($314,000 - $255,000)	$59,000.00
Decrease in accrued liabilities ($53,000 - $45,000)	-$8,000.00
Increase in income tax payable ($84,100 - $81,400)	$2,700.00
Net Cash provided by operating activities		$246,040.00

Joyner Company
Statement of Cash Flows
For year 2
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Cash provided by operating activities		$246,040.00
Cash Flow from Investing Activities:
Purchase of Property, Plant and Equipment ($635,000 - $500,000 + $30,500)	-$165,500.00
Loan to Hymans Company	-$45,000.00
Sale of equipment	$29,400.00
Net Cash used in Investing activities		-$181,100.00
Cash Flow from Financing Activities:
Proceed from issue of common stock ($343,000 - $272,000)	$71,000.00
Dividend Paid ($98,000 + $257,740 - $322,940)	-$32,800.00
Proceed from issue of bond ($196,000 - $117,000)	$79,000.00
Net Cash Provided by financing activities		$117,200.00
Net Increase / (Decrease) in Cash		$182,140.00
Cash balance at beginning of year		$52,500.00
Cash balance at end of year		$234,640.00

Free cash flow = Operating cash flow - Capital expenditure - dividend paid

= $246,040 - $165,500 - $32,800 = $47,740