Question

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

Assest and Contra-Asset Account		Liabilities and Stockholder's Equity
Cash	$16 D	AP	$50 I
AR	$20 I	Accured libilities	$20 D
Inventory	50 I	Income taxes payable	$25 I
Prepaid expenses	$15 I	Bonds Payable	$172 I
Long-Term Investments	$17 D	Common Stock	$80 D
Property, plant and equipment	$335 I	Retained Earnings	$70 I
Accumilated depreciation	$70 I

D = Decrease; I = Increase.

ong-term investments that cost the company $17 were sold during the year for $38 and land that cost $37 was sold for $20. In addition, the company declared and paid $14 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		$900
Cost of Goods sold		390
Gross Margin		510
Selling and Administrative expenses		380
Net Operating Income		130
Nonoperating income:
Loss on sale of land	($17)
Gain on sale of investments	21	4
Income before taxes		134
Income taxes		50
Net Income		$84

The company’s beginning cash balance was $120 and its ending balance was $104.

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.

Required 1

Pavalik Company
Statement of Cash Flows
		$0

Required 2

Pavalik Company
Statement of Cash Flows
Operating activities:
Investining activitirs:
Financiang activitirs:
Beginning cash and cash equivalents
Ending cash and cash equivalents		$0

Answer 1

There seems to be some problem with the data regarding beginning and ending cash balance. Although the purpose is to understand how cash flow statement is prepared so I have given the solution with provided data.

Cash Flow from Operating Activities:
Net Income		$      84.00
Add: Adjustments
Profit on sale of Long term Investment	$    (21.00)
Loss on sale of Land	$       17.00
Depreciation expense	$       70.00
Increase in Accounts Payables	$       50.00
Increase in Income taxes payable	$       25.00
Decrease in Accrued liability	$    (20.00)
Increase in Accounts receivables	$    (20.00)
Increase in Inventory	$    (50.00)
Increase in Prepaid Expenses	$    (15.00)
		$      36.00
A. Cash Flow from Operating Activities		$    120.00

Povolik Company
Cash Flow Statement
For this year ended
Cash Flow from Operating Activities:
A. Cash Flow from Operating Activities		$    120.00
Cash Flow from Investing Activities:
Sale ofd Investment	$       38.00
Sale of Land	$       20.00
Purchase of Property plant and Equipment	$ (372.00)
B. Cash flow from Investing Activities		$ (314.00)
Cash Flow from Financing Activities:
Purchase of Tresury stock	$    (80.00)
Dividend paid	$    (14.00)
Proceeds from issue of Bonds	$    172.00
C. Cash Flow from Financing Activities		$      78.00
Increase (Decrease) in cash [A+B+C]		$ (116.00)
Add: cash at the beginning of the year		$    120.00
Cash at the end of the year		$        4.00

General notes for cash flow

Cash is increased when Current liability increase or Current asset Decrease.

Cash is Decreased when Current liability Decrease or Current asset Increase.

Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash

Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.