The following are the financial statements of Gil Company.

GIL COMPANYIncome StatementFor the Year Ended December 31, 2021

Sales ............................................................. $242,000Cost of goods sold ........................................ 175,000Gross profit ..................................................... 67,000Operating expenses ....................................... 24,000Income from operations ............................... 43,000Interest expense .............................................. 3,000Income before income taxes ....................... 40,000Income tax expense ........................................ 8,000Profit ............................................................ $ 32,000

Additional information:

1. Dividends declared and paid were $20,000. Gil reports under ASPE.

2. During the year, equipment was sold for $8,500 cash. This equipment cost $18,000 originally and had a carrying value of $8,500 at the time of sale.

3. All depreciation expense, $14,500, is in the operating expenses.

4. All sales and purchases are on account.

Instructions

a. Prepare a statement of cash flows using the indirect method.

b. Calculate free cash flow.

Taking It Further

Gil Company had a positive cash balance at the beginning and end of 2021. Given that, is it possible that the company could have had a negative cash balance at one or more points during the year? Explain.

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GIL COMPANY Balance Sheet December 31 Assets 2021 2020 S 38,000 $ 20,000 Cash Accounts receivable 30,000 14,000 Inventory Equipment Accumulated depreciation-equipment 27,000 20,000 60,000 78,000 (29,000) S126,000 (24,000) Total $108,000 Liabilities and Shareholders' Equity Accounts payable Income taxes payable Notes payable Common shares Retained earnings Total $ 24,000 7,000 27,000 18,000 50,000 $ 15,000 8,000 33,000 14,000 38,000 $126,000 $108,000