Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	708,000
Cost of goods sold		387,000
Gross margin		321,000
Selling and administrative expenses		151,100
Net operating income		169,900
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		177,900
Income taxes		53,370
Net income	$	124,530

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	97,030		$	80,700
Accounts receivable		228,000			132,000
Inventory		319,000			276,000
Prepaid expenses		8,500			17,000
Total current assets		652,530			505,700
Property, plant, and equipment		620,000			519,000
Less accumulated depreciation		165,300			130,600
Net property, plant, and equipment		454,700			388,400
Loan to Hymans Company		46,000			0
Total assets	$	1,153,230		$	894,100
Liabilities and Stockholders' Equity
Accounts payable	$	314,000		$	270,000
Accrued liabilities		45,000			51,000
Income taxes payable		85,200			81,100
Total current liabilities		444,200			402,100
Bonds payable		191,000			113,000
Total liabilities		635,200			515,100
Common stock		332,000			284,000
Retained earnings		186,030			95,000
Total stockholders' equity		518,030			379,000
Total liabilities and stockholders' equity	$	1,153,230		$	894,100

Equipment that had cost $30,200 and on which there was accumulated depreciation of $11,200 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.)	Cash flows from operating activities-Indirect Method
	Particulars	Amount	Working
	Cash flows from operating activities
	Net income	124,530	Given
	Adjustments for:
	Depreciation on property, plant & equipment	45,900	(165,300-130,600+11,200)
	Gain on Sale of equipment	-8,000	Given
	Increase in accounts receivables	-96,000	(132,000-228,000 )
	Increase in inventories	-43,000	(276,000-319,000 )
	Decrease in prepaid expenses	8,500	(17,000-8,500 )
	Increase in accounts payable	44,000	(314,000-270,000)
	Increase in income tax payable	4,100	(85,200-81,100)
	Decrease in accured liabilities	-6,000	(45,000-51,000)
	Cash generated from operating activities	74,030
2.)	Statement of Cash flow for Year 2
	Particulars	Amount	Working
	Cash flow from operating activities	74,030
	Cash flows from investing activities
	Sale of equipment	27,000	Given
	Purchase of property, plant & equipment	-131,200	(620,000 - 519,000 + 30,200 )
	Loan to Hymans Company	-46,000	Given
	Net cash used in investing activities	-150,200
	Cash flows from financing activities
	Proceeds from issue of common stock	48,000	(332,000-284,000 )
	Proceeds from issue of bond payable	78,000	(191,000-113,000)
	Dividend paid	-33,500	( 95,000 + 124,530 - 518,030 )
	Net cash used in financing activities	92,500
	Net increase in cash and cash equivalents (A)	16,330
	Cash and cash equivalents at beginning of period (B)	80,700	Given
	Cash and cash equivalents at end of period =A+B	97,030	Given
		-
3.)	Free Cash Flow for year 2
	Net cash provided by opeating activities	74,030
	Less: Capital Expenditure	131,200
	Less: Dividends	33,500
	Free cash flow for year 2	-90,670