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	$	10	D	Accounts payable	$	32	I
Accounts receivable	$	14	I	Accrued liabilities	$	14	D
Inventory	$	38	D	Income taxes payable	$	19	I
Prepaid expenses	$	9	I	Bonds payable	$	124	I
Long-term investments	$	11	D	Common stock	$	56	D
Property, plant, and equipment	$	245	I	Retained earnings	$	52	I
Accumulated depreciation	$	52	I

D = Decrease; I = Increase.

Long-term investments that cost the company $11 were sold during the year for $26 and land that cost $25 was sold for $14. In addition, the company declared and paid $8 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					$	720
Cost of goods sold						306
Gross margin						414
Selling and administrative expenses						320
Net operating income						94
Nonoperating items:
Loss on sale of land	$	(11	)
Gain on sale of investments		15				4
Income before taxes						98
Income taxes						38
Net income					$	60

The company’s beginning cash balance was $108 and its ending balance was $98.

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

a)		Cash flows from operating activities
		Net income		$60
		Adjustments for:
		Loss on Sale of Land	11
		Gain on Sale of Investments	-15
		Depreciation	52	48
		Increase in trade receivables	-14
		Decrease in inventories	38
		Increase in Prepaid Expenses	-9
		Increase in Accounts Payable	32
		Decrease in accrued liabilities	($14)
		Increase in Income taxes payable	$19	52
		Cash generated from operations		160
b)		PAVOLIK COMPANY
		STATEMENT OF CASH FLOWS
		FOR THE YEAR ENDED
		Cash flows from operating activities
		Net income		$60
		Adjustments for:
		Loss on Sale of Land	11
		Gain on Sale of Investments	-15
		Depreciation	52	48
		Increase in trade receivables	-14
		Decrease in inventories	38
		Increase in Prepaid Expenses	-9
		Increase in Accounts Payable	32
		Decrease in accrued liabilities	($14)
		Increase in Income taxes payable	$19	52
		Cash generated from operations		160
		Cash flows from investing activities
		Proceeds from sale of Land	14
		Proceeds from sale of Long Term Investments	26
		Purchase of Property, Plant and equipment	-270
		Net cash used in investing activities		-230
		Cash flows from financing activities
		Proceeds from issue of Bonds	124
		Purchase of Common Stock	-56
		Dividends paid	-8
		Net cash used in financing activities		60
		Net increase in cash and cash equivalents		-10
		Cash and cash equivalents at beginning of period		108
		Cash and cash equivalents at end of period		$98
		Increase in property, plant and equipment	245
		Add : Sale of Land	25
		Purchase of property, plant and equipment	270