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 $ 30 D Accounts payable $ 92 I
Accounts receivable $ 34 I Accrued liabilities $ 34 D
Inventory $ 78 D Income taxes payable $ 39 I
Prepaid expenses $ 29 I Bonds payable $ 284 I
Long-term investments $ 31 D Common stock $ 136 D
Property, plant, and equipment $ 545 I Retained earnings $ 112 I
Accumulated depreciation $ 112 I

D = Decrease; I = Increase.

Long-term investments that cost the company $31 were sold during the year for $66 and land that cost $65 was sold for $34. In addition, the company declared and paid $28 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 $ 1,320
Cost of goods sold 586
Gross margin 734
Selling and administrative expenses 520
Net operating income 214
Nonoperating items:
Loss on sale of land $ (31 )
Gain on sale of investments 35 4
Income before taxes 218
Income taxes 78
Net income $ 140

The company’s beginning cash balance was $148 and its ending balance was $118.

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

Pavolik Company
Statement of cash flow
For the year ended
Operating activity
Net income	140
Adjustment To Net income
Less: Gain on sale of investments	(35)
Add: Loss on sale of land	31
Add: Depreciation expense	112
Add: Income tax expense	78
Add: Decrease in Inventory	78
Less: Increase in Account receivable	(34)
Less: Increase in Prepaid expense	(29)
Add: Increase in Account payable	92
Less : Decrease in Accrued liabilities	(34)
Less: Income tax expense paid (78-39)	(39)
Net cash flow from operating activity		360
Investing activity
Sale of Long term investment	66
Purchase of Plant, and equipment (Notes 1)	(610)
Sale of Land	34
Net cash flow from investing activity		(510)
Financial activity
Repurchase of common stock (Decrease in Common stock)	(136)
Issued of bond payable	284
Dividend paid	(28)
Net cash flow from financial activity		120
Change in cash		(30)
Add: beginning cash		148
Ending cash		118

Notes 1
Increase Property, plant, and equipment	545
Add: Cost of Sale of Land property	65
Purchase of Plant, and equipment	610
Accumulated depreciation Increase due to Depreciation expense which already include in Selling and administrative expenses.	112