Prepare a Statement of Cash Flows; Free Cash Flow [LO1, LO2, LO3]

Foxboro Company’s income statement for Year 2 follows:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 400,000 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 Selling and administrative expenses . . . . . . . 216,000 Net operating income . . . . . . . . . . . . . . . . . . . 84,000 Gain on sale of equipment . . . . . . . . . . . . . . . 6,000 Income before taxes . . . . . . . . . . . . . . . . . . . . 90,000 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 27,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,000 Its balance sheet amounts at the end of Years 1 and 2 are as follows:

Equipment that had cost $30,000 and on which there was accumulated depreciation of $10,000 was sold during Year 2 for $26,000. 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.