The comparative balance sheets for Zagloba Materials, Inc., for December 31, 2011 and 2010 follow. Additional information about Zagloba Materials’ operations during 2011 is as follows: (a) net income, $28,000; (b) building and equipment depreciation expense amounts, $15,000 and $3,000, respectively; (c) equipment that cost $13,500 with accumulated depreciation of $12,500 sold at a gain of $5,300; (d) equipment purchases, $12,500; (e) patent amortization, $3,000; purchase of patent, $1,000; (f) funds borrowed by issuing notes payable, $25,000; notes payable repaid, $15,000; (g) land and building purchased for $162,000 by signing a mortgage for the total cost; (h) 1,500 shares of $20 par value common stock issued for a total of $50,000; and (i) paid cash dividend, $9,000.

REQUIRED

1. Using the indirect method, prepare a statement of cash flows for Zagloba Materials.

2. Why did Zagloba Materials have an increase in cash of $67,200 when it recorded net income of only $28,000? Discuss and interpret.

3. Compute and assess cash flow yield and free cash flow for 2011. (Note: Round cash flow yield to one decimal place.) What is your assessment of Zagloba’s ability to generate sufficient cash flow?

Zagloba Materials, Inc. Comparative Balance Sheets December 31, 2011 and 2010 2011 2010 Assets 94,560 102,430 112,890 $27,360 75,430 137,890 20,000 Cash Accounts receivable (net) Inventory Prepaid expenses Land Building Accumulated depreciation-building Equipment Accumulated depreciation-equipment Patents Total assets 25,000 137,000 (15,000) 33,000 (14,500) 4,000 $479,380 34,000 (24,000) 6,000 $276,680 Liabilities and Stockholders' Equity Accounts payable Notes payable (current) Accrued liabillties Mortgage payable Common stock, $10 par value Additional paid-in capital Retained earnings Total liabilities and stockholders' equity S 10,750 10,000 s 36,750 12,300 162,000 180,000 57,200 59,430 $479,380 150,000 37,200 40,430 $276,680