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	$	29	D	Accounts payable	$	89	I
Accounts receivable	$	33	I	Accrued liabilities	$	33	D
Inventory	$	76	D	Income taxes payable	$	38	I
Prepaid expenses	$	28	I	Bonds payable	$	276	I
Long-term investments	$	30	D	Common stock	$	132	D
Property, plant, and equipment	$	530	I	Retained earnings	$	109	I
Accumulated depreciation	$	109	I

D = Decrease; I = Increase.

Long-term investments that cost the company $30 were sold during the year for $64 and land that cost $63 was sold for $33. In addition, the company declared and paid $27 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					$	1,290
Cost of goods sold						572
Gross margin						718
Selling and administrative expenses						510
Net operating income						208
Nonoperating items:
Loss on sale of land	$	(30	)
Gain on sale of investments		34				4
Income before taxes						212
Income taxes						76
Net income					$	136

The company’s beginning cash balance was $146 and its ending balance was $117.

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

SOLUTION : 1
	Statement of Cash Flows - Indirect Method
		Amount in $	Amount in $
	Net income		$                   136
	Cash flows from operating activities
	Adjustments for:
	Depreciation	$                      109
	Loss on sale of land	$                        30
	Gain on sale of investment	$                       -34
	(Increase) / Decrease in Account receivables	$                       -33
	Inventory Decrease / (Increase)	$                        76
	Increase in prepaid expenses	$                       -28
	Increase in income tax payabe	$                        38
	Accounts payable Increase / ( Decrese)	$                        89
	Decrease in Accrued Liabilities	$                       -33
			$                   214
	Net cash from operating activities		$                   350
SOLUTION : 2
	Statement of Cash Flows - Indirect Method
		Amount in $	Amount in $
	Net income		$                   136
	Cash flows from operating activities
	Adjustments for:
	Depreciation	$                      109
	Loss on sale of land	$                        30
	Gain on sale of investment	$                       -34
	(Increase) / Decrease in Account receivables	$                       -33
	Inventory Decrease / (Increase)	$                        76
	Increase in prepaid expenses	$                       -28
	Increase in income tax payabe	$                        38
	Accounts payable Increase / ( Decrese)	$                        89
	Decrease in Accrued Liabilities	$                       -33
			$                   214
	Net cash from operating activities		$                   350
	Cash flows from investing activities
	Purchase of property , plant and equipment	$                    -530
	Sales of investment(30 + 34 - 30)	$                        34
	Net cash used in investing activities		$                  -496
	Cash flows from Financing activities
	Purchase of common stock	$                    -132
	Issue of Bonds	$                      276
	Dividend Paid	$                       -27
	Net cash used in financing activities		$                   117
	Net increase in cash and cash equivalents		$                    -29
	Add :Cash and cash equivalents at beginning of period		$                   146
	Cash and cash equivalents at end of period		$                   117
	Dividend Calculation
	Net Profit =	$                      136
	Less: Increase in Retained earnings	$                      109
	Dividend Paid	$                        27