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.
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.
This solution illustrates how to compute the changes in key accounts used in constructing a statement of cash flows using the indirect method, as well as how to prepare the statement and how to compute free cash flow.