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	$	16	D	Accounts payable	$	46	I
Accounts receivable	$	165	I	Accrued liabilities	$	4	D
Inventory	$	70	D	Income taxes payable	$	19	I
Prepaid expenses	$	20	I	Bonds payable	$	128	I
Long-term investments	$	17	D	Common stock	$	47	D
Property, plant, and equipment	$	163	I	Retained earnings	$	54	I
Accumulated depreciation	$	49	I

D = Decrease; I = Increase.

Long-term investments that cost the company $17 were sold during the year for $27 and land that cost $26 was sold for $20. In addition, the company declared and paid $30 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					$	660
Cost of goods sold						400
Gross margin						260
Selling and administrative expenses						184
Net operating income						76
Nonoperating items:
Loss on sale of land	$	(6	)
Gain on sale of investments		10				4
Income before taxes						80
Income taxes						24
Net income					$	56

The company’s beginning cash balance was $123 and its ending balance was $107.

Required:

Use the direct method to convert the company's income statement to a cash basis. (Adjustment amounts that are to be deducted should be indicated with a minus sign.)

	Pavolik Company Direct Method of Determining the Net Cash flows from Operating activities Net income $294,000 Adjustments to a cash basis: $294,000 Adjustments to a cash basis: 0 Selling and administrative expenses Adjustments to a cash basis: 0 Income taxes Adjustments to a cash basis: 0 $294,000

Answer 1

	Cash flow from operating activities with adjustments	Amount (in $)
	Sales	660
	- Increase in accounts receivable	165
A	Cash receipts from customers	495
	Cost of Goods Sold	400
	-Decrease in inventory	70
	-Increase in Accounts Payable	46
B	Cash paid to suppliers	284
	Selling & administrative expenses	184
	+Increase in prepaid expenses	20
	+Decrease in accrued liabilities	4
C	Cash payments for operating expenses	208
	Income tax	24
	-Increase in income tax payable	19
D	Cash payments for income tax expense	5
	Cash provided by (used by) operating activities (A-B-C-D)	-2

Note : Loss/ Gain on sale of assets is a non-cash item, hence, excluded.