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

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