Question

Exercise 12-4 Prepare a Statement of Cash Flows [LO12-1, LO12-2]

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

  

Asset and Contra-Asset Accounts				Liabilities and Equity Accounts
Cash	$	28	D	Accounts payable	$	86	I
Accounts receivable	$	32	I	Accrued liabilities	$	32	D
Inventory	$	74	D	Income taxes payable	$	37	I
Prepaid expenses	$	27	I	Bonds payable	$	268	I
Long-term investments	$	29	D	Common stock	$	128	D
Property, plant, and equipment	$	515	I	Retained earnings	$	106	I
Accumulated depreciation	$	106	I

D = Decrease; I = Increase.

  

Long-term investments that had cost the company $29 were sold during the year for $62, and land that had cost $61 was sold for $32. In addition, the company declared and paid $26 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			$	1,260
Cost of goods sold				558
Gross margin				702
Selling and administrative expenses				500
Net operating income				202
Nonoperating items:
Loss on sale of land	$	(29)
Gain on sale of investment		33		4
Income before taxes				206
Income taxes				74
Net income			$	132

  

The company’s beginning cash balance was $144 and its ending balance was $116.

  

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

1) Pavolik Company

Statement of Cash Flows (Partial) (Amounts in $)

Net Income		132
Adjustments to reconcile net income to operating cash flows
Add: Depreciation Expense (Increase in Accumulated Depreciation)	106
Add: Loss on Sale of Land	29
Less: Gain on sale of Investment	(33)
Less: Increase in Accounts Receivable	(32)
Add: Decrease in Inventory	74
Less: Increase in Prepaid Expenses	(27)
Add: Increase in Accounts Payable	86
Less: Decrease in Accrued Liabilities	(32)
Add: Increase in Income taxes payable	37
Total Adjustments		208
Net Cash provided by Operating Activities		340

2)   Pavolik Company

Statement of Cash Flows (Amounts in $)

Operating Activities
Net Cash provided by Operating Activities (A)		340
Investing Activities
Sale of Land	32
Sale of long term investments	62
Purchase of property, plant and equipment (increase in PPE) ($515+$61 cost of sale of land)	(576)
Net Cash used in Investing Activities (B)		(482)
Financing Activities
Issue of Bonds	268
Repayment of Common Stock	(128)
Cash Dividends paid	(26)
Net Cash provided by Financing Activities (C)		114
Net Increase/(decrease) in cash (A+B+C)		(28)
Add: Beginning Cash Balance		144
Ending Cash Balance		116