Question

The following changes took place last year in Pavolik Company’s balance sheet accounts:

Asset and Contra-Asset Accounts				Liabilities and Stockholders' Equity Accounts
Cash and cash equivalents	$	5	D	Accounts payable	$	35	I
Accounts receivable	$	110	I	Accrued liabilities	$	4	D
Inventory	$	70	D	Income taxes payable	$	8	I
Prepaid expenses	$	9	I	Bonds payable	$	150	I
Long-term investments	$	6	D	Common stock	$	80	D
Property, plant, and equipment	$	185	I	Retained earnings	$	54	I
Accumulated depreciation	$	60	I

D = Decrease; I = Increase.

Long-term investments that cost the company $6 were sold during the year for $16 and land that cost $15 was sold for $9. In addition, the company declared and paid $30 in cash dividends during the year. Besides the sale of land, no other sales or retirements of plant and equipment took place during the year. Pavolik did not retire any bonds during the year or issue any new common stock.

The company’s income statement for the year follows:

Sales					$	700
Cost of goods sold						400
Gross margin						300
Selling and administrative expenses						184
Net operating income						116
Nonoperating items:
Loss on sale of land	$	(6	)
Gain on sale of investments		10				4
Income before taxes						120
Income taxes						36
Net income					$	84

The company’s beginning cash balance was $90 and its ending balance was $85.

Required:

1. Use the indirect method to determine the net cash provided by operating activities for the year.

2. Prepare a statement of cash flows for the year.

Answer 1

1.

Pavolik Company
Cash Flow Statement
Cash flows from operating activities
Net Income		$    84
Adjustments for:
Depreciation expenses	$      60
Loss on Sale of Land	$        6
Gain on sale of Investment	$   (10)
Increase in Accounts Receiveble	$ (110)
Decrease in Inventory	$      70
Increase in Prepaid Expenses	$      (9)
Increase in Accounts Payable	$      35
Decrease in Accrued Liabilities	$      (4)
Increase in Income tax payable	$        8
		$    46
Cash Generated from Operations		$ 130

2.

Pavolik Company
Cash Flow Statement
Cash Generated from Operations		$   130
Cash flows from investing activities
Sale of Land	$        9
Sale of Investment	$      16
Purchase of Property, Plant and Equipment	$ (200)		185+15
Net cash used in investing activities		$ (175)
Cash flows from financing activities
Repurchase of common stock	$   (80)
Dividends Paid	$   (30)
Proceeds from Issue of bonds	$   150
Net cash provided in financing activities		$      40
Net Decrease in cash and cash equivalents		$      (5)
Cash and cash equivalents at beginning of period		$      90
Cash and cash equivalents at end of period		$      85

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