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Computing the Components of a Statement of Cash Flows

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.

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Solution Summary

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.

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