Question

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

  

Asset and Contra-Asset Accounts				Liabilities and 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 had cost the company $31 were sold during the year for $66, and land that had 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 investment		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.	Using the indirect method, determine the net cash provided by / used in operating activities for the year. (List any deduction in cash and cash outflows as negative amounts.)

   

2.	Prepare a statement of cash flows for the year. (List any deduction in cash and cash outflows as negative amounts.)

   

Answer 1

Part 1)

The net cash provided by/used in operating activities with the use of indirect method is calculated as follows:

Cash Flow from Operating Activities
Net Income	140
Adjustments To Convert Net Income to a Cash Basis:
Add Loss on Sale of Land	31
Depreciation	112
Decrease in Inventory	78
Increase in Accounts Payable	92
Increase in Income Taxes Payable	39
Less Increase in Accounts Receivable	-34
Increase in Prepaid Expenses	-29
Gain on Sale of Investment	-35
Increase in Accrued Liabilities	-34
Cash Flow Provided by Operating Activities	$360

______

Part 2)

The cash flow statement is prepared as below:

Pavolik Company
Cash Flow Statement
Operating Activities:
Net Cash Provided by Operating Activities (A)	360
Investing Activities:
Additions to Property, Plant, and Equipment (545+65)	-610
Proceeds from Sale of Long Term Investments	66
Proceeds from Sale of Land	34
Net Cash Used for Investing Activities (B)	-510
Financing Activities:
Payment of Cash Dividends	-28
Increase in Bonds	284
Decrease in Common Stock	-136
Net Cash Provided by Financing Activities (C)	120
Net Decrease in Cash (A+B+C)	-30
Add Cash Balance, Beginning	148
Cash Balance, Ending	$118