Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	714,000
Cost of goods sold		303,000
Gross margin		411,000
Selling and administrative expenses		217,000
Net operating income		194,000
Nonoperating items:
Gain on sale of equipment		7,000
Income before taxes		201,000
Income taxes		80,400
Net income	$	120,600

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

	Year 2			Year 1
Assets
Cash	$	65,800		$	87,600
Accounts receivable		253,000			118,000
Inventory		320,000			274,000
Prepaid expenses		9,000			18,000
Total current assets		647,800			497,600
Property, plant, and equipment		635,000			508,000
Less accumulated depreciation		166,500			130,800
Net property, plant, and equipment		468,500			377,200
Loan to Hymans Company		45,000			0
Total assets	$	1,161,300		$	874,800
Liabilities and Stockholders' Equity
Accounts payable	$	319,000		$	261,000
Accrued liabilities		43,000			54,000
Income taxes payable		84,100			81,800
Total current liabilities		446,100			396,800
Bonds payable		198,000			110,000
Total liabilities		644,100			506,800
Common stock		339,000			279,000
Retained earnings		178,200			89,000
Total stockholders' equity		517,200			368,000
Total liabilities and stockholders' equity	$	1,161,300		$	874,800

Equipment that had cost $31,500 and on which there was accumulated depreciation of $11,500 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

1.

Joyner Company
Cash Flows from Operating Activities
For Year 2
	$	$
Cash flows from Operating Activities
Net Income		120,600
Adjustments to reconcile net income to net cash flows from operations.
Depreciation	47,200
Gain on sale of equipment	(7,000)
Increase in accounts receivable	(135,000)
Increase in inventory	(46,000)
Decrease in prepaid expenses	9,000
Increase in accounts payable	58,000
Decrease in accrued liabilities	(11,000)
Increase in income taxes payable	2,300	(82,500)
Net cash flow from Operating Activities		38,100

2.

Joyner Company
Statement of Cash Flows
For Year 2
	$	$
Cash Flows from Operating Activities		38,100
Cash Flows from Investing Activities
Sale proceeds of equipment	27,000
Cash paid for acquiring plant assets	(158,500)
Loan made to Hymans Company	(45,000)
Net cash used in Investing Activities		(176,500)
Cash Flows from Financing Activities
Proceeds from issuance of common stock	60,000
Proceeds from issuance of bonds payable	88,000
Cash dividends	(31,400)
Net cash flow from Financing Activities		116,600
Decrease in cash		(21,800)
Cash, beginning of Year 2		87,600
Cash, end of Year 2		65,800

3. Free cash flow = Cash flows from Operations - Net Capital Expenditures = $ 38,100 - $ ( 158,500 - 27,000) = $ ( 93,400)