Joyner Company’s income statement for Year 2 follows: Sales $ 920,000 Cost of goods sold 506,000 Gross margin 414,000 Selling and administrative expenses 328,000 Net operating income 86,000 Nonoperating items: Gain on sale of equipment 7,000 Income before taxes 93,000 Income taxes 27,900 Net income $ 65,100 Its balance sheet amounts at the end of Years 1 and 2 are as follows: Year 2 Year 1 Assets Cash $ -25,900 $ -7,700 Accounts receivable 248,000 168,000 Inventory 314,000 264,000 Prepaid expenses 7,000 14,000 Total current assets 543,100 438,300 Property, plant, and equipment 500,000 401,000 Less accumulated depreciation 125,000 120,300 Net property, plant, and equipment 375,000 280,700 Loan to Hymans Company 38,000 0 Total assets $ 956,100 $ 719,000 Liabilities and Stockholders' Equity Accounts payable $ 308,000 $ 254,000 Accrued liabilities 20,000 26,000 Income taxes payable 50,000 43,000 Total current liabilities 378,000 323,000 Bonds payable 180,000 74,000 Total liabilities 558,000 397,000 Common stock 285,000 240,000 Retained earnings 113,100 82,000 Total stockholders' equity 398,100 322,000 Total liabilities and stockholders' equity $ 956,100 $ 719,000 Equipment that had cost $41,000 and on which there was accumulated depreciation of $32,000 was sold during Year 2 for $16,000. 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/used in operating activities for Year 2. 2. Prepare a statement of cash flows for Year 2. 3. Compute the free cash flow for Year 2.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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Joyner Company’s income statement for Year 2 follows:
| Sales | $ 920,000 |
|---|---|
| Cost of goods sold | 506,000 |
| Gross margin | 414,000 |
| Selling and administrative expenses | 328,000 |
| Net operating income | 86,000 |
| Nonoperating items: | |
| Gain on sale of equipment | 7,000 |
| Income before taxes | 93,000 |
| Income taxes | 27,900 |
| Net income | $ 65,100 |
Its
| Year 2 | Year 1 | |
|---|---|---|
| Assets | ||
| Cash | $ -25,900 | $ -7,700 |
| 248,000 | 168,000 | |
| Inventory | 314,000 | 264,000 |
| Prepaid expenses | 7,000 | 14,000 |
| Total current assets | 543,100 | 438,300 |
| Property, plant, and equipment | 500,000 | 401,000 |
| Less |
125,000 | 120,300 |
| Net property, plant, and equipment | 375,000 | 280,700 |
| Loan to Hymans Company | 38,000 | 0 |
| Total assets | $ 956,100 | $ 719,000 |
| Liabilities and |
||
| Accounts payable | $ 308,000 | $ 254,000 |
| Accrued liabilities | 20,000 | 26,000 |
| Income taxes payable | 50,000 | 43,000 |
| Total current liabilities | 378,000 | 323,000 |
| Bonds payable | 180,000 | 74,000 |
| Total liabilities | 558,000 | 397,000 |
| Common stock | 285,000 | 240,000 |
| 113,100 | 82,000 | |
| Total stockholders' equity | 398,100 | 322,000 |
| Total liabilities and stockholders' equity | $ 956,100 | $ 719,000 |
Equipment that had cost $41,000 and on which there was accumulated depreciation of $32,000 was sold during Year 2 for $16,000. 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/used in operating activities for Year 2.
2. Prepare a statement of
3. Compute the
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