The comparative balance sheets

The comparative balance sheets for Arif Fabrics, Inc, for December 31, 2010 and 2009 appear below:

2010 2009
Assets
Cash $ 94,560 $ 27,360
Accounts receivable (net) 102,430 75,430
Inventory 112,890 137,890
Prepaid expenses — 20,000
Land 25,000 —
Building 137,000 —
Accumulated depreciation–building (15,000) —
Equipment 33,000 34,000
Accumulated depreciation–equipment (14,500) (24,000)
Patents 4,000 6,000
Total assets $479,380 $276,680
Liabilities and Stockholders’ Equity
Accounts payable $ 10,750 $ 36,750
Notes payable (current) 10,000 —
Accrued liabilities — 12,300
Mortgage payable 162,000 —
Common stock, $10 par value 180,000 150,000
Additional paid-in capital 57,200 37,200
Retained earnings 59,430 40,430
Total liabilities and stockholders’ equity $479,380 $276,680

Additional information about Arif Fabrics’s operations during 2010 is as fol-
lows: (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) equip-
ment 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 Arif
Fabrics.
2. Why did Arif Fabrics have an increase in cash of $67,200 when it recorded
User insight net income of only $28,000? Discuss and interpret.
3. Compute and assess cash flow yield and free cash flow for 2010. What is your
User insight assessment of Arif’s cash-generating ability?

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