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PROBLEM 14–9 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:
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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.
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