Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	707,000
Cost of goods sold		301,000
Gross margin		406,000
Selling and administrative expenses		217,000
Net operating income		189,000
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		197,000
Income taxes		59,100
Net income	$	137,900

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	90,200		$	75,600
Accounts receivable		262,000			142,000
Inventory		320,000			271,000
Prepaid expenses		9,000			18,000
Total current assets		681,200			506,600
Property, plant, and equipment		631,000			517,000
Less accumulated depreciation		166,300			131,100
Net property, plant, and equipment		464,700			385,900
Loan to Hymans Company		40,000			0
Total assets	$	1,185,900		$	892,500
Liabilities and Stockholders' Equity
Accounts payable	$	317,000		$	270,000
Accrued liabilities		48,000			57,000
Income taxes payable		85,600			81,500
Total current liabilities		450,600			408,500
Bonds payable		203,000			111,000
Total liabilities		653,600			519,500
Common stock		333,000			280,000
Retained earnings		199,300			93,000
Total stockholders' equity		532,300			373,000
Total liabilities and stockholders' equity	$	1,185,900		$	892,500

Equipment that had cost $31,600 and on which there was accumulated depreciation of $10,000 was sold during Year 2 for $29,600. 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

Solution 1:

Joyner Company
Statement of Cash Flows (Partial)
For year 2
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$137,900.00
Adjustments to reconcile net income to net cash provided by operations:
Depreciation Expense ($166,300 - $131,100 + $10,000)	$45,200.00
Gain on sale of equipment	-$8,000.00
Increase in accounts receivables ($262,000 - $142,000)	-$120,000.00
Increase in inventory ($320,000 - $271,000)	-$49,000.00
Decrease in prepaid expenses ($18,000 - $9,000)	$9,000.00
Increase in accounts payable ($317,000 - $270,000)	$47,000.00
Decrease in accrued liabilities ($57,000 - $48,000)	-$9,000.00
Increase in income tax payable ($85,600 - $81,500)	$4,100.00
Net Cash provided by operating activities		$57,200.00

Solution 2:

Joyner Company
Statement of Cash Flows
For year 2
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Cash provided by operating activities		$57,200.00
Cash Flow from Investing Activities:
Purchase of Property, Plant and Equipment ($631,000 - $517,000 + $31,600)	-$145,600.00
Loan to Hymans Company	-$40,000.00
Sale of equipment	$29,600.00
Net Cash used in Investing activities		-$156,000.00
Cash Flow from Financing Activities:
Proceed from issue of common stock ($333,000 - $280,000)	$53,000.00
Dividend Paid ($93,000 + $137,900 - $199,300)	-$31,600.00
Proceed from issue of bond ($203,000 - $111,000)	$92,000.00
Net Cash Provided by financing activities		$113,400.00
Net Increase / (Decrease) in Cash		$14,600.00
Cash balance at beginning of year		$75,600.00
Cash balance at end of year		$90,200.00

Solution 3:

Free cash flow = Cash flow from operating activities - Capital expenditure - Dividend

= $57,200 - $145,600 - $31,600

= ($120,000)