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	$	6	D	Accounts payable	$	20	I
Accounts receivable	$	10	I	Accrued liabilities	$	10	D
Inventory	$	30	D	Income taxes payable	$	15	I
Prepaid expenses	$	5	I	Bonds payable	$	97	I
Long-term investments	$	7	D	Common stock	$	40	D
Property, plant, and equipment	$	180	I	Retained earnings	$	30	I
Accumulated depreciation	$	40	I

D = Decrease; I = Increase.

Long-term investments that cost the company $7 were sold during the year for $18 and land that cost $17 was sold for $10. In addition, the company declared and paid $14 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					$	600
Cost of goods sold						250
Gross margin						350
Selling and administrative expenses						280
Net operating income						70
Nonoperating items:
Loss on sale of land	$	(7	)
Gain on sale of investments		11				4
Income before taxes						74
Income taxes						30
Net income					$	44

The company’s beginning cash balance was $100 and its ending balance was $94.

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
	Statement of Cash Flow (Partial)
	Cash flows from operating activities:
	Net Income		44
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation expense	40
	Gain on sale of investments	(11)
	Loss on sale of land	7
	Increase in accounts receivable	(10)
	Decrease in inventory	30
	Increase in prepaid expense	(5)
	Increase in accounts payable	20
	Decrease in accrued liabilities	(10)
	Increase in income tax payable	15
			76
	Net Cash Provided by Operating Activities		120
2
	Operating activities
	Net Cash Provided by Operating Activities		120
	Investing Activities
	Proceeds from Sale of investment	18
	Proceeds from Sale of land	10
	Purchase of equipment.	(197)
	Net Cash Provided (Used) by investing activities:		(169)
	Financing Activities
	Proceeds from issue of bonds payable	97
	Purchase of common stock	(40)
	Payment of Dividends	(14)
	Net Cash Provided (Used) by financing activities:		43
	Net increase/(decrease) in cash		(6)
	Beginning cash and cash equivalents		100
	Ending cash and cash equivalents		94