In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After careful study, Mr. Duncan has determined the following: a. A building in which a car wash could be installed is available under a five-year lease at a cost of $1,700 per month. b. Purchase and installation costs of equipment would total $200,000. In five years the equipment could be sold for about 10% of its original cost. c. An investment of an additional $2,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. d. Both a wash and a vacuum service would be offered with a wash costing $2.00 and the vacuum costing $1.00 per use. e. The only variable costs associated with the operation would be 20 cents per wash for water and 10 cents per use of the vacuum for electricity. f. In addition to rent, monthly costs of operation would be: cleaning, $450 ; insurance, $75; and maintenance, $500. e. Gross receipts from the wash would be about $1,350 per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum.

The net cash provided by operating activities is computed as follows:

Net income........................................................................................		$56,000
Adjustments to convert net income to cash basis:
Depreciation..................................................................................	$ 42,000
Increase in accounts receivable......................................................	(80,000)
Increase in inventory.....................................................................	(50,000)
Decrease in prepaid expenses........................................................	7,000
Increase in accounts payable.........................................................	60,000
Decrease in accrued liabilities........................................................	(10,000)
Increase in income taxes payable...................................................	3,000
Gain on sale of equipment.............................................................	(8,000)	(36,000)
Net cash provided by operating activities..........................................		$20,000

2. Prepare a statement of cash flows.

Investing and Financing activities:

The guidelines from Exhibit 12-3 can be used to analyze the changes in noncash balance sheet accounts that impact investing and financing cash flows as follows:

	Increase in Account Balance	Decrease in Account Balance
Noncurrent Assets
Property, plant, and equipment................... y1-y2	150,000
Loan to Hymans Company......................... y1-y2	40,000
Liabilities and Stockholders Equity
Bonds payable............................................ y2-y1	+ 120,000
Common stock............................................ y2-y1	+ 30,000

Please note that the loan to Hymans is recorded as a cash outflow in the investing activities section of the statement. Because Joyner did not retire any bonds during the year, the corresponding amount in the table on the prior page represents a cash inflow pertaining to a bond issuance. Joyner did not repurchase any of its own stock during the year, so the increase in common stock is reported as a cash inflow in the financing activities section of the statement. Property, plant, and equipment and retained earnings require further analysis as follows:

Property, plant, and equipment:

Beginning balance + Debits Credits = Ending balance

$400,000 + Debits $40,000 = $510,000

Debits = $510,000 $xxx,000 + $xx,000

Debits = $xxx,000

Credit of $40,000 is from cost of equipment (p591 last paragraph)

The additions to property, plant, and equipment from your debits answer above ($xxx,000) are recorded as a cash outflow and the proceeds from the sale of equipment ($18,000) are recorded as a cash inflow.

Retained earnings:

Beginning balance Debits + Credits = Ending balance

$83,000 Debits + $56,000 = $124,000

$139,000 = $xxx,000 + Debits

Debits = $xx,000

Tip: The dividend payment ($xx,000) should be recorded as a cash outflow in the financing activities section of the statement of Cash flow for Joyner (See below)

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Please note that the loan to Hymans is recorded as a cash outflow in the investing activities section of the statement. Because Joyner did not retire any bonds during the year, the corresponding amount in the table on the prior page represents a cash inflow pertaining to a bond issuance. Joyner did not repurchase any of its own stock during the year, so the increase in common stock is reported as a cash inflow in the financing activities section of the statement. Property, plant, and equipment and retained earnings require further analysis as follows:

Property, plant, and equipment:

Beginning balance + Debits Credits = Ending balance

$400,000 + Debits $40,000 = $510,000

Debits = $510,000 $xxx,000 + $xx,000

Debits = $xxx,000

Credit of $40,000 is from cost of equipment (p591 last paragraph)

The additions to property, plant, and equipment from your debits answer above ($xxx,000) are recorded as a cash outflow and the proceeds from the sale of equipment ($18,000) are recorded as a cash inflow.

Retained earnings:

Beginning balance Debits + Credits = Ending balance

$83,000 Debits + $56,000 = $124,000

$139,000 = $xxx,000 + Debits

Debits = $xx,000

Tip: The dividend payment ($xx,000) should be recorded as a cash outflow in the financing activities section of the statement of Cash flow for Joyner (See below)

	Joyner Company
	Statement of Cash Flows
	For Year 2

	Operating activities:
	Net income.................................................................................		$xx,000
	Adjustments to convert net income to cash basis:
	Depreciation............................................................................	$ xx,000
	Increase in accounts receivable...............................................	(xx,000)
	Increase in inventory...............................................................	(xx,000)
	Decrease in prepaid expenses..................................................	x,000
	Increase in accounts payable...................................................	xx,000
	Decrease in accrued liabilities.................................................	(xx,000)
	Increase in income taxes payable............................................	x,000
	Gain on sale of equipment......................................................	(x,000)	(3x,000)
	Net cash provided by operating activities....................................		xx,000
	Investing activities:
	Proceeds from sale of equipment................................................	xx,000
	Loan to Hymans Company.........................................................	(xx,000)
	Additions to plant and equipment........................ y1-y2 + 40000	(1xx,000)
	Net cash used in investing activities............................................		(1xx,000)
	Financing activities:
	Issuance of bonds payable................................................ y2-y1	xx0,000
	Issuance of common stock................................................ y2-y1	x0,000
	Cash dividends (see retained earnings RE debits).......................	(xx,000)
	Net cash provided by financing activities...................................		1xx,000
	Net decrease in cash...................................................................		(17,000)
	Beginning cash and cash equivalents........... provided on pg 591		xx,000
	Ending cash and cash equivalents................ provided on pg 591		$x,000

3. Free cash flow computation:

Net cash provided by operating activities (see Question 1) seessee		$ xx,000
Capital expenditures(see property, plant, equip,debits)....	$xxx,000
Dividends (see retained earnings debits)..........................	xx,000	165,000
Free cash flow.....................................................................		$(xxx,000)

4. Why did cash decline so sharply during the year?