Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $900,000

Cost of goods sold . . . . . . . . . . . . . . . . . 500,000

Gross margin . . . . . . . . . . . . . . . . . . . . . . 400,000

Selling and administrative expenses . . . . 328,000

Net operating income . . . . . . . . . . . . . . . 72,000

Gain on sale of equipment . . . . . . . . . . . 8,000

Income before taxes . . . . . . . . . . . . . . . . 80,000

Income taxes . . . . . . . . . . . . . . . . . . . . . . 24,000

Net income . . . . . . . . . . . . . . . . . . . . . . . $ 56,000

Year 2 Year 1

Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000 $ 21,000

Accounts receivable . . . . . . . . . . . . . . . . . . 250,000 170,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000 260,000

Prepaid expenses . . . . . . . . . . . . . . . . . . . . 7,000 14,000

Total current assets . . . . . . . . . . . . . . . . . . . 571,000 465,000

Property, plant, and equipment . . . . . . . . . . 510,000 400,000

Less accumulated depreciation . . . . . . . . 132,000 120,000

Net property, plant, and equipment . . . . . . . 378,000 280,000

Loan to Hymans Company . . . . . . . . . . . . . 40,000 0

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $989,000 $745,000

Liabilities and Stockholders Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . $310,000 $250,000

Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 20,000 30,000

Income taxes payable . . . . . . . . . . . . . . . . . 45,000 42,000

Total current liabilities . . . . . . . . . . . . . . . . . . 375,000 322,000

Bonds payable . . . . . . . . . . . . . . . . . . . . . . 190,000 70,000

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 565,000 392,000

Common stock . . . . . . . . . . . . . . . . . . . . . . 300,000 270,000

Retained earnings . . . . . . . . . . . . . . . . . . . . 124,000 83,000

Total stockholders equity . . . . . . . . . . . . . . 424,000 353,000

Total liabilities and stockholders equity . . . $989,000 $745,000

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

Equipment that had cost $40,000 and on which there was accumulated depreciation of $30,000 was sold during Year 2 for $18,000. The company declared and paid a cash dividend during Year 2.It did not retire any bonds or repurchase any of its own stock.

Required:

1. Using the indirect method, compute the net cash provided by operating activities for Year 2.

2. Prepare a statement of cash flows for Year 2.

3. Compute the free cash flow for Year 2.

4. Briefly explain why cash declined so sharply during the year.