The comparative balance sheets for Sharma Fabrics, Inc., for December 31, 20x8 and 20x7 appear on the opposite page.

Additional information about Sharma Fabric's operations during 20x8 is as follows:

(a) Net income, $56,000;

(b) Building and equipment depreciation expense amounts, $ 30,000 and $ 6,000, respectively;

(c) Equipment that cost $27,000 with accumulated depreciation of $25,000 sold at a gain of $10,600;

(d) Equipment purchases, $25,000;

(e) Patent amortization, $6,000; purchase of patent, $2,000;

(f) Funds borrowed by issuing notes payable, $50,000; notes payable repaid, $30,000;

(g) Land and building purchased for $324,000 by signing a mortgage for the total cost;

(h) 3,000 shares of $20 par value common stock issued for a total of $100,000; and

(i) Paid cash dividend, $18,000.

Required

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

2. Why did Sharma Fabrics have an increase in cash of $134,400 when it recorded net income of only $56,000? Discuss and interpret.

3. Compute and assess cash flow yield and free cash flow for 20x8. What is your assessment of Sharma's cash-generating ability?

Sharma Fabrics, Inc.

Comparative Balance Sheets

December 31, 20x8 and 20x7

Liabilities and Stockholders' Equity

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20x8 20x7 Assets Cash Accounts receivable (net) Inventory Prepaid expenses Land Building Accumulated depreciation, building Equipment Accumulated depreciation, equipment Patents Total assets $189,120 54,720 150,860 275,780 40,000 204,860 225,780 50,000 274,000 (30,000) 66,000 68,000 (29,000) (48,000) 12,000 $958,760 $553,360 8,000 Accounts payable Notes payable (current) Accrued liabilities Mortgage payable Common stock, $10 par value Additional paid-in capital Retained earnings Total liabilities and stockholders' equity $ 21,500 20,000 73,500 24,600 300,000 74,400 80,860 $958,760 $553,360 324,000 360,000 114,400 118,860