Question

Joyner Company’s income statement for Year 2 follows:

Sales	$	718,000
Cost of goods sold		43,000
Gross margin		675,000
Selling and administrative expenses		218,000
Net operating income		457,000
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		465,000
Income taxes		139,500
Net income	$	325,500

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

	Year 2			Year 1
Assets
Cash and cash equivalents	$	285,100		$	78,400
Accounts receivable		255,000			124,000
Inventory		320,000			278,000
Prepaid expenses		10,000			20,000
Total current assets		870,100			500,400
Property, plant, and equipment		634,000			509,000
Less accumulated depreciation		165,600			130,400
Net property, plant, and equipment		468,400			378,600
Loan to Hymans Company		41,000			0
Total assets	$	1,379,500		$	879,000
Liabilities and Stockholders' Equity
Accounts payable	$	316,000		$	257,000
Accrued liabilities		50,000			56,000
Income taxes payable		85,900			81,000
Total current liabilities		451,900			394,000
Bonds payable		195,000			119,000
Total liabilities		646,900			513,000
Common stock		349,000			275,000
Retained earnings		383,600			91,000
Total stockholders' equity		732,600			366,000
Total liabilities and stockholders' equity	$	1,379,500		$	879,000

Equipment that had cost $30,900 and on which there was accumulated depreciation of $11,000 was sold during Year 2 for $27,900. 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
Statement of Cash flows
For Year 2
Cash flows from operating activities
Net Income		$ 325,500
Adjustments to reconcile net income to ;
Depreciation expense	$      46,200		165600-130400+11000
Gain on sale of equipment	$      (8,000)
Increase in accounts receivable	$ (131,000)
Increase in inventories	$   (42,000)
Decrease in prepaid expense	$      10,000
Increase in accounts payable	$      59,000
Decrease in accrued liabilities	$      (6,000)
Increase in income tax payable	$        4,900
		$ (66,900)
Net cash provided by operating activities		$ 258,600

2.

Joyner Company
Statement of Cash flows
For Year 2
Net cash provided by operating activities		$   258,600
Cash flows from investing activities
Cash paid for purchase of property, plant and equipment	$ (155,900)		509000-634000-30900
Cash received from sale of equipment	$      27,900
Loan given to Hymans Company	$   (41,000)
Net cash used by investing activities		$ (169,000)
Cash flows from financing activities
Cash paid for dividends	$   (32,900)		383600-91000-325500
Cash received from issuance of stock	$      74,000
Cash received from issuance of bonds	$      76,000
Net cash provided by financing activities		$   117,100
Net Increase in cash and cash equivalents		$   206,700
Cash and cash equivalents at beginning of period		$      78,400
Cash and cash equivalents at end of period		$   285,100

3.

Net cash provided by operating activities	$   258,600
Less: Capital expenditures	$ (155,900)
Less: Dividends	$   (32,900)
Free cash flow	$      69,800

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