PROBLEM 14–9 Prepare a Statement of Cash Flows; Free Cash Flow [LO1, LO2, LO3]

Foxboro Company’s income statement for Year 2 follows:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 400,000

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 300,000

Selling and administrative expenses . . . . . . . 216,000

Net operating income . . . . . . . . . . . . . . . . . . . 84,000

Gain on sale of equipment . . . . . . . . . . . . . . . 6,000

Income before taxes . . . . . . . . . . . . . . . . . . . . 90,000

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 27,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,000

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

Equipment that had cost $30,000 and on which there was accumulated depreciation of $10,000

was sold during Year 2 for $26,000. 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.