Assignment
Prepare a Statement of Cash Flows; Free Cash Flow [LO14-1, LO14-2, LO14-3] Joyner Company's income statement for Year 2 follows:
Sales $900,000
Cost of goods sold 500,000
Gross margin 400,000
Selling and administrative expenses 328,000
Net operating income 72,000
Gain on sale of equipment 8,000
Income before taxes 80,000
Income taxes 24,000
Net income $ 56,000
Its balance sheet amounts at the end of Years 1 and 2 are as follows:
Year 2 Year 1
Assets
Cash $ 4,000 $ 21,000
Accounts receivable 250,000 170,000
Inventory 310,000 260,000
Prepaid expenses 7,000 14,000
Total current assets 571,000 465,000
Property, plant, and equipment 510,000 400,000
Less accumulated depreciation 132,000 120,000
Net property, plant, and equipment 378,000 280,000
Loan to Hymans Company 40,000 0
Total assets $989,000 $745,000
Liabilities and Stockholders' Equity
Accounts payable $310,000 $250,000
Accrued liabilities 20,000 30,000
Income taxes payable 45,000 42,000
Total current liabilities 375,000 322,000
Bonds payable 190,000 70,000
Total liabilities 565,000 392,000
Common stock 300,000 270,000
Retained earnings 124,000 83,000
Total stockholders' equity 424,000 353,000
Total liabilities and stockholders' equity $989,000 $745,000
Equipment that had cost $40,000 and on which there was accumulated depreciation of $30,000 was sold during Year 2 for $18,000. 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 operating activities for Year 2.
2. Prepare a statement of cash flows for Year 2.
3. Compute the free cash flow for Year 2.
4. Briefly explain why cash declined so sharply during the year.