The comparative balance sheets for Sharma Fabrics, Inc., for December 31, 2011 and 2010, appear on the new page. Additional information about Sharma Fabrics' operation during 2011 is as follows:

(a) Net income, $56,000;

(b) Building and equipment depreciation expense amounts, $ 30,000 and $60,000, respectively;

(c) Equipment that cost $ 27,000 with accumulate depreciation of $25,000 sold at a gain of $10,600;

(d) Equipment purchase $25,000;

(e) Patent amortization, $6,000; purchase of patent, $2,000;

(f) Funds borrowed by issuing notes payable, $50,000; note 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. 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. Compute and assess cash flow yield and free cash flow for 2011. What is your assessment of Sharma's cash-generatingability?

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Sharma Fabrics, Inc. Comparative Balance Sheets December 31, 2011 and 2010 2011 2010 Assets $54,720 150,860 275,780 40,000 Cash Accounts receivable (net) Inventory Prepaid expenses Land Building Accumulated depreciation-building Equipment Accumulated depreciation-equipment Patents Total assets $189,120 204,860 225,780 50,000 274,000 (30,000) 66,000 (29,000) 8,000 $958,760 68,000 (48,000 12,000 $553,360 Liabllitles and Stockholders' Equity 21,500 20,000 Accounts payable Notes payable (current Accrued liabilities Mortgage payable Common stock, $10 par value Additional paid-in capital Retained earnings Total liabilities and stockholders' equity 73,500 24,600 324,000 360,000 114,400 118,860 $958,760 300,000 74,400 80,860 $553,360