Problem 14-9 – Statement of Cash flows

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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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