Question

Exercise 14-4 Prepare a Statement of Cash Flows [LO14-1, LO14-2]

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	$	36	D	Accounts payable	$	110	I
Accounts receivable	$	40	I	Accrued liabilities	$	40	D
Inventory	$	90	D	Income taxes payable	$	45	I
Prepaid expenses	$	35	I	Bonds payable	$	332	I
Long-term investments	$	37	D	Common stock	$	160	D
Property, plant, and equipment	$	635	I	Retained earnings	$	130	I
Accumulated depreciation	$	130	I

D = Decrease; I = Increase.

Long-term investments that cost the company $37 were sold during the year for $78 and land that cost $77 was sold for $40. In addition, the company declared and paid $34 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					$	1,500
Cost of goods sold						670
Gross margin						830
Selling and administrative expenses						580
Net operating income						250
Nonoperating items:
Loss on sale of land	$	(37	)
Gain on sale of investments		41				4
Income before taxes						254
Income taxes						90
Net income					$	164

The company’s beginning cash balance was $160 and its ending balance was $124.

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

Pavolik Company Property, plant, and equipment Additions 712 Sale of land 77 164 Change 635 712 712 Statement of Cashflow For the period ending ... Cashflow from the operating activity Net Income Adjustments: Loss on sale of land Gain on sale of investments Depreciation Expense Increase in Accounts receivable Decrease in Inventory Increase in Prepaid expenses Increase in Accounts payable Decrease in Accrued liabilities Increase in Income taxes payable Cash generated from Operating Activity 256 420 -712 Cashflow from the Investing activity Property, plant, and equipment purchased Long-term investments sold Land sold Cash used fro Investing Activity -594 -34 -160 Cashflow from the Financing activity Dividends paid Bonds issued Treasury Stock Cash generated from Financing Activity Net decrease in Cash Beginning Cash Balance Ending Cash Balance 138 -36 160 124