Complete "Problem 14-10 Prepare a Statement of Cash Flows; Free Cash Flow" in chapter 14 of Managerial Accounting. Present your responses in an Excel spreadsheet.
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.