Question

Joyner Company’s income statement for Year 2 follows:

Joyner Company’s Income Statement
Sales	$	790,000
Cost of goods sold		406,000
Gross margin		384,000
Selling and administrative expenses		216,000
Net operating income		168,000
Nonoperating items:
Gain on sale of equipment		6,000
Income before taxes		174,000
Income taxes		52,200
Net income	$	121,800

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

Joyner Company's Balance Sheet
	Year 2		Year 1
Assets
Cash	$	221,000	$	207,500
Accounts receivable		259,000		133,000
Inventory		319,000		272,000
Prepaid expenses		9,500		19,000
Total current assets		808,500		631,500
Property, plant, and equipment		465,000		363,000
Less accumulated depreciation		165,000		130,400
Net property, plant, and equipment		300,000		232,600
Loan to Hymans Company		41,000		0
Total assets	$	1,149,500	$	864,100
Liabilities and Stockholders' Equity
Accounts payable		316,000		259,000
Accrued liabilities		45,000		56,000
Income taxes payable		85,700		81,100
Total current liabilities		446,700		396,100
Bonds payable		194,000		108,000
Total liabilities		640,700		504,100
Common stock		332,000		270,000
Retained earnings		176,800		90,000
Total stockholders' equity		508,800		360,000
Total liabilities and stockholders' equity	$	1,149,500	$	864,100

Equipment that had cost $30,200 and on which there was accumulated depreciation of $11,200 was sold during Year 2 for $25,000. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.

Sam Conway, president of the company, considers $225,000 to be the minimum cash balance for operating purposes. As can be seen from the balance sheet data, only $221,000 in cash was available at the end of the current year. The sharp decline is puzzling to Mr. Conway, particularly because sales and profits are at a record high.

Required:

1. Using the direct method, adjust the company’s income statement to a cash basis for Year 2.

2. Using the data from (1) above and other data from the problem as needed, prepare a statement of cash flows for Year 2.

Answer 1

Answer is given below