PROBLEM 15–9 Prepare a Statement of Cash Flows (Indirect Method); Free Cash Flow

Balance sheet accounts for Joyner Company contained the following amounts at the end of Years 1 and 2:

Debit Balance Accounts Year 2 Year 1
Cash $4,000 $21,000
A/R $250,000 $170,000
Inventory $310,000 $260,000
Prepaid Exp $7,000 $14,000
Loan to Hymas Company $40,000 $-
Plant & Equip $510,000 $400,000
Total Debits $1,121,000 $865,000

Credit Balance Accounts
Accum Depreciation $132,000 $120,000
A/P $310,000 $250,000
Accrued Liabilities $20,000 $30,000
Bonds Payable $190,000 $70,000
Deferred Income Taxes $45,000 $42,000
Common Stock $300,000 $270,000
Retained Earnings $124,000 $83,000
Total Credits $1,121,000 $865,000

The 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


Equipment that had cost $40,000 and on which there was accumulated depreciation of $30,000 was sold during Year 2 for $18,000. Cash dividends totaling $15,000 were declared and paid during Year 2.
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 f ow for Year 2.
4. Briefly explain why cash declined so sharply during the year.