Problem 14A-7 Prepare and Interpret a Statement of Cash Flows [LO14-1, LO14-4]

Joyner Companys income statement for Year 2 follows:

Joyner Companys Income Statement
Sales	$	795,000
Cost of goods sold		406,000
Gross margin		389,000
Selling and administrative expenses		235,000
Net operating income		154,000
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		162,000
Income taxes		48,600
Net income	$	113,400

Its balance sheet amounts at the end of Years 1 and 2 are as follows:

Joyner Company's Balance Sheet
	Year 2		Year 1
Assets
Cash	$	80,600	$	237,400
Accounts receivable		258,000		121,000
Inventory		318,000		281,000
Prepaid expenses		8,500		17,000
Total current assets		665,100		656,400
Property, plant, and equipment		568,000		354,000
Less accumulated depreciation		165,900		131,300
Net property, plant, and equipment		402,100		222,700
Loan to Hymans Company		95,000		0
Total assets	$	1,162,200	$	879,100
Liabilities and Stockholders' Equity
Accounts payable		312,000		265,000
Accrued liabilities		44,000		57,000
Income taxes payable		84,700		81,100
Total current liabilities		440,700		403,100
Bonds payable		199,000		103,000
Total liabilities		639,700		506,100
Common stock		345,000		278,000
Retained earnings		177,500		95,000
Total stockholders' equity		522,500		373,000
Total liabilities and stockholders' equity	$	1,162,200	$	879,100

Equipment that had cost $30,800 and on which there was accumulated depreciation of $11,000 was sold during Year 2 for $27,800. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.

Sam Conway, president of the company, considers $84,600 to be the minimum cash balance for operating purposes. As can be seen from the balance sheet data, only $80,600 in cash was available at the end of the current year. The sharp decline is puzzling to Mr. Conway, particularly because sales and profits are at a record high.

Required:

1. Using the direct method, adjust the companys income statement to a cash basis for Year 2.

2. Using the data from (1) above and other data from the problem as needed, prepare a statement of cash flows for Year 2.