Ortega Corporation’s income statement for the year ended June 30, 2010 and its comparative balance sheets as of June 30, 2010 and 2009 appear on the next page. During 2010, the corporation sold at a loss of $4,000 equipment that cost $24,000, on which it had accumulated depreciation of $17,000. It also

purchased land and a building for $100,000 through an increase of $100,000 in Mortgage Payable; made a $20,000 payment on the mortgage; repaid notes but borrowed an additional $30,000 through the issuance of a new note payable of $80,000; and declared and paid a $60,000 cash dividend.

Required

1. Using the indirect method, prepare a statement of cash flows. Include a supporting schedule of noncash investing and financing transactions.

2. What are the primary reasons for Ortega Corporation’s large increase in cash from 2009 to 2010?

3. Compute and assess cash flow yield and free cash flow for 2010. How would you assess the corporation’s cash-generating ability?

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Ortega Corporation Income Statement For the Year Ended June 30, 2010 Sales $4,040,900 3,656,300 $ 384,600 Cost of goods sold Gross margin Operating expenses (including depreciation expense of $60,000) Income from operations Other income (expenses) Loss on sale of equipment Interest expense 189,200 $ 195,400 ($ 4,000) (37,600) (41,600) $ 153,800 34,200 $ 119,600 Income before income taxes Income taxes expense Net income Ortega Corporation Comparative Balance Sheets June 30, 2010 and 2009 2010 2009 Assets $ 20,000 120,000 220,000 Cash Accounts receivable (net) Inventory Prepaid expenses Property, plant, and equipment Accumulated depreciation, property, plant, and equipment $167,000 100,000 180,000 600 1,000 552,000 628,000 (140,000) (183,000) $892,600 $773,000 Total assets Llabilities and Stockholders' Equity $ 64,000 $ 42,000 Accounts payable Notes payable (due in 90 days) Income taxes payable Mortgage payable Common stock, $5 par value Retained earnings Total liabilities and stockholders' equity 30,000 26,000 80,000 18,000 360,000 200,000 280,000 200,000 212,600 153,000 $773,000 $892,600