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	$	21	D	Accounts payable	$	65	I
Accounts receivable	$	25	I	Accrued liabilities	$	25	D
Inventory	$	60	D	Income taxes payable	$	30	I
Prepaid expenses	$	20	I	Bonds payable	$	212	I
Long-term investments	$	22	D	Common stock	$	100	D
Property, plant, and equipment	$	410	I	Retained earnings	$	85	I
Accumulated depreciation	$	85	I

D = Decrease; I = Increase.

Long-term investments that cost the company $22 were sold during the year for $48 and land that cost $47 was sold for $25. In addition, the company declared and paid $19 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					$	1,050
Cost of goods sold						460
Gross margin						590
Selling and administrative expenses						430
Net operating income						160
Nonoperating items:
Loss on sale of land	$	(22	)
Gain on sale of investments		26				4
Income before taxes						164
Income taxes						60
Net income					$	104

The company’s beginning cash balance was $130 and its ending balance was $109.

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

Net income	104
Adjustments to convert net income to a cash basis:
Depreciation	85
Increase in accounts receivable	-25
Decrease in inventory	60
Increase in prepaid expenses	-20
Increase in accounts payable	65
Decrease in accrued liabilities	-25
Increase in income taxes payable	30
Gain on sale of long-term investments	-26
Loss on sale of land	22
Net cash provided by operating activities	270

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

Pavolik Company
Statement of Cash Flows (partial)
Operating activities:
Net cash provided by operating activities		270
Investing activities:
Proceeds from sale of long-term investments	48
Proceeds from sale of land	25
Additions to property, plant & equipment *	-457
Net cash used in investing activities	.	-384
Financing activities:
Issuance of bonds payable	212
Purchase of common stock	-100
Cash dividends	-19
Net cash provided by financing activities		93
Net decrease in cash		-21
Beginning cash and cash equivalents		130
Ending cash and cash equivalents		109

Additions to property, plant & equipment * Increase in Property Plant and Equipment After sales of land is $410 Hence total addition to plant and equipment =$410+47 =457