The comparative balance sheets for Arif Fabrics, Inc., for December 31, 2010 and 2009 appear below.

Additional information about Arif Fabrics’s operations during 2010 is as follows: (a) net income, $28,000; (b) building and equipment depreciation expense amounts, $15,000 and $3,000, respectively; (c) equipment that cost $13,500 with accumulated depreciation of $12,500 sold at a gain of $5,300; (d) equipment purchases, $12,500; (e) patent amortization, $3,000; purchase of patent, $1,000; (f) funds borrowed by issuing notes payable, $25,000; notes payable repaid, $15,000; (g) land and building purchased for $162,000 by signing a mortgage for the total cost; (h) 1,500 shares of $20 par value common stock issued for a total of $50,000; and (i) paid cash dividend, $9,000.

Required

1. Using the indirect method, prepare a statement of cash flows for Arif Fabrics.

2. Why did Arif Fabrics have an increase in cash of $67,200 when it recorded net income of only $28,000? Discuss and interpret.

3. Compute and assess cash flow yield and free cash flow for 2010. What is your assessment of Arif’s cash-generating ability?

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Arif Fabrics, Inc. Comparative Balance Sheets December 31, 2010 and 2009 2009 2010 Assets $ 94,560 102,430 112,890 $ 27,360 75,430 137,890 Cash Accounts receivable (net) Inventory Prepaid expenses Land 20,000 25,000 Building Accumulated depreciation-building Equipment Accumulated depreciation-equipment 137,000 (15,000) 33,000 34,000 (14,500) 4,000 $479,380 (24,000) Patents 6,000 $276,680 Total assets Llabilitles and Stockholders' Equity $ 10,750 10,000 $ 36,750 Accounts payable Notes payable (current) Accrued liabilities 12,300 Mortgage payable Common stock, $10 par value Additional paid-in capital Retained earnings Total liabilities and stockholders' equity 162,000 180,000 150,000 57,200 59,430 $479,380 37,200 40,430 $276,680