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.

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.

Cash Flow Statement
Indirect Method
Cash flow from Operating Activities
Net Income		$     2,57,740
Adjustments
Depreciation	$      47,100			=166100-130100+11100
Gain on sale of equipment	$     -10,000
Increase in Accounts Receivable	$     -79,000			=150000-229000
Increase in Inventory	$     -32,000			=287000-319000
Decrease in Prepaid Expenses	$         8,500			=17000-8500
Increase in Accounts payable	$      59,000			=314000-255000
Decrease in Accrued Liabilities	$       -8,000			=45000-53000
Increase in Income tax payable	$         2,700			=84100-81400
Total Adjustments		$       -11,700
Net Cash from operating activities			$   2,46,040

2.

Cash Flow Statement
Indirect Method
Cash flow from Operating Activities
Net Income		$     2,57,740
Adjustments
Depreciation	$      47,100			=166100-130100+11100
Gain on sale of equipment	$     -10,000
Increase in Accounts Receivable	$     -79,000			=150000-229000
Increase in Inventory	$     -32,000			=287000-319000
Decrease in Prepaid Expenses	$         8,500			=17000-8500
Increase in Accounts payable	$      59,000			=314000-255000
Decrease in Accrued Liabilities	$       -8,000			=45000-53000
Increase in Income tax payable	$         2,700			=84100-81400
Total Adjustments		$       -11,700
Net Cash from operating activities			$   2,46,040
Cash flow from Investing Activities
Sale of Equipment		$        29,400
Loan to Hymas Company		$       -45,000
Purchase of Equipment		$    -1,65,500		=500000-30500-635000
Net Cash used in investing activities			$ -1,81,100
Cash flow from Financing Activities
Issue of Common Stock		$        71,000		=343000-272000
Issue of Bonds Payable		$        79,000		=196000-117000
Payment of cash dividends		$       -32,800		=-(98000+257740-322940)
Net Cash from financing activities			$   1,17,200
Net Increase in cash			$   1,82,140
Beginning Balance of Cash			$      52,500
Ending Balance of Cash			$   2,34,640

3. Free cash flow = Net Cash from operating activities - capital expenditure
= $246040 - 136100 = $109940

Alternatively it can be $64940 i.e. Net Cash from operating activities - Net cash used in investing activites