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 and cash equivalents	$	12	D	Accounts payable	$	38	I
Accounts receivable	$	16	I	Accrued liabilities	$	16	D
Inventory	$	42	D	Income taxes payable	$	21	I
Prepaid expenses	$	11	I	Bonds payable	$	140	I
Long-term investments	$	13	D	Common stock	$	64	D
Property, plant, and equipment	$	275	I	Retained earnings	$	58	I
Accumulated depreciation	$	58	I

D = Decrease; I = Increase.

Long-term investments that cost the company $13 were sold during the year for $30 and land that cost $29 was sold for $16. In addition, the company declared and paid $10 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					$	780
Cost of goods sold						334
Gross margin						446
Selling and administrative expenses						340
Net operating income						106
Nonoperating items:
Loss on sale of land	$	(13	)
Gain on sale of investments		17				4
Income before taxes						110
Income taxes						42
Net income					$	68

The company’s beginning cash balance was $112 and its ending balance was $100.

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.

Net income $68 Adjustments to convert gross margin to a cash basis: $58 Depreciation 13 Loss on sale of land (17) Gain on sale of long-term investments (16) Increase in accounts receivable 42 Decrease in inventory (11) Increase in prepaid expenses 38 Increase in accounts payable (16) Decrease in accrued liabilities 21 Decrease in income taxes payable 112 Net cash used in operating activities $180

• Pavolik CompanyStatement of Cash FlowsOperating activities:Net cash provided by operating activities$180Investing activities:$16Proceeds from sale of land30Gain on sale of long-term investments(304)Additions to property, plant & equipmentNet cash provided by investing activities(258)Financing activities:Purchase of common stock(64)Cash dividends paid(10)Retirement of bonds payable14066Net decrease in cash and cash equivalents(12)Beginning cash and cash equivalents112Ending cash and cash equivalents$100

Answer 1

Solution 1:

Pavolik Company
Computation of cash flow from operating activities
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$68.00
Adjustments to reconcile net income to net cash provided by operations:
Depreciation Expense	$58.00
Loss on sale of land	$13.00
Gain on sale of investment	-$17.00
Increase in accounts receivables	-$16.00
Decrease in inventory	$42.00
Increase in prepaid expenses	-$11.00
Increase in accounts payable	$38.00
Decrease in accrued liabilities	-$16.00
Increase in Income tax payable	$21.00
Net Cash provided by operating activities		$180.00

Solution 2:

Pavolik Company
Statement of Cash Flows
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Cash provided by operating activities		$180.00
Cash Flow from Investing Activities:
Purhcase of property, Plant and Equipment ($275 + $29)	-$304.00
Proceed from sale of investment	$30.00
Proceed from sale of Land	$16.00
Net Cash Provided by Investing activities		-$258.00
Cash Flow from Financing Activities:
Proceed from issue of bond	$140.00
Retirement of common stock	-$64.00
Dividend Paid	-$10.00
Net Cash Provided by financing activities		$66.00
Net Increase / (Decrease) in Cash		-$12.00
Beginning cash and cash equivalents		$112.00
Ending cash and cash equivalents		$100.00