The comparative balance sheets for Sharma Fabrics, Inc., for December 31, 20x7 and 20x6 appear on the oposite page. Additional information about Sharma Fabrics’s operations during 20x7 is as follows: (a) net income, $56,000; (b) building and equipment depreciation expense amounts, $30,000 and $6,000, respectively; (c) equipment that cost $27,000 with accumulated depreciation of $25,000 sold at a gain of

$10,600; (d) equipment purchases, $25,000; (e) patent amortization, $6,000; purchase of patent, $2,000; (f) funds borrowed by issuing notes payable, $50,000; notes payable repaid, $30,000; (g) land and building purchased for $324,000 by signing a mortgage for the total cost; (h) 3,000 shares of $20 par value common stock issued for a total of $100,000; and (i) paid cash dividend, $18,000.

Required

1. Using the indirect method, prepare a statement of cash flows for Sharma Fabrics, Inc.

2. User Insight: Why did Sharma Fabrics have an increase in cash of $134,400 when it recorded net income of only $56,000? Discuss and interpret.

3. User Insight: Compute and assess cash flow yield and free cash flow for 20x7. What is your assessment of Sharma’s cash-generating ability?

 

 

Sharma Fabrics, Inc. Comparative Balance Sheets December 31, 20x7 and 20x6
Â	20x7	20x6
Â	Assets	Â
Cash	$189,120	$ 54,720
Accounts receivable (net)	204,860	150,860
Inventory	225,780	275,780
Prepaid expenses	—	40,000
Land	50,000	—
Building	274,000	—
Accumulated depreciation, building	(30,000)	—
Equipment	66,000	68,000
Accumulated depreciation, equipment	(29,000)	(48,000)
Patents	8,000	12,000
Total assets	$958,760	$553,360

 

Liabilities and Stockholders’ Equity
Accounts payable	$ 21,500	$ 73,500
Notes payable (current)	20,000	—
Accrued liabilities	—	24,600
Mortgage payable	324,000	—
Common stock, $10 par value	360,000	300,000
Additional paid-in capital	114,400	74,400
Retained earnings	118,860	80,860
Total liabilities and stockholders’ equity	$958,760	$553,360