P$12\mathrm{.}8$A Prepare a statement of cash flows$--$direct method, and compute cash$-$based ratios

Presented below are the financial statements of Warner Company.

WARNER COMPANY

Comparative Balance Sheet

December $31$

Assets $20222023$

Cash $$35,000$ $$20,000$

Accounts receivable $20,00014,000$

Inventory $28,00020,000$

Property, plant, and equipment $60,00078,000$

Accumulated depreciation $(32,000)(24,000)$

Total $$111,000$ $$108,000$

Liabilities and Stockholders' Equity

Accounts payable $$19,000$ $$15,000$

Income taxes payable $7,0008,000$

Bonds payable $17,00033,000$

Common stock $18,00014,000$

Retained earnings $50,00038,000$

Total $$111,000$ $$108,000$

WARNER COMPANY

Income Statement

For the Year Ended December $31,2022$

Sales Revenue $$242,000$

Cost of goods sold $175,000$

Gross profit $67,000$

Selling expenses $$18,000$

Administrative expenses $6,00024,000$

Income from operations $43,000$

Interest expense $3,000$

Income before income taxes $40,000$

Income tax expense $8,000$

Net income $$32,000$

Additional data:

$1.$ Depreciation expense was $$17,500.$

$2.$ Dividends declared and paid were $$20,000.$

$3.$ During the year equipment was sold for $$8,500$ cash. This equipment cost $$18,000$

originally and had accumulated depreciation of $$9,500$ at the time of sale.

Further analysis reveals the following.

$1.$ Accounts payable pertains to merchandise suppliers.

$2.$ All operating expenses except for depreciation were paid in cash.

$3.$ All depreciation expense is in the selling expense category'

$4.$ All sales and purchases are on account.

Instructions

$($a$)$ Prepare a statement of cash flows for Warner Company using the direct method.

$($b$)$ Compute free cash flow.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a $"?".$

After you have completed P$12\mathrm{.}8$A$,$ consider the additional question.

$1.$ Assume that $2022$ balance for accounts receivable, inventory and

accounts payable changed to $$19,000,$ $$31,000$ and $$21,000$

respectively. Show the impact of these changes on the statement of

cash flows and the ratios.