PROBLEM 1410 Prepare a Statement of Cash Flows; Free Cash Flow [LO141, LO142, LO143]

Joyner Companys 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:

Assets	Year 1	Year 2
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	Year 1	Year 2
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.