Question

14. 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	$	10	D	Accounts payable	$	32	I
Accounts receivable	$	14	I	Accrued liabilities	$	14	D
Inventory	$	38	D	Income taxes payable	$	19	I
Prepaid expenses	$	9	I	Bonds payable	$	124	I
Long-term investments	$	11	D	Common stock	$	56	D
Property, plant, and equipment	$	245	I	Retained earnings	$	52	I
Accumulated depreciation	$	52	I

D = Decrease; I = Increase.

Long-term investments that cost the company $11 were sold during the year for $26 and land that cost $25 was sold for $14. In addition, the company declared and paid $8 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					$	720
Cost of goods sold						306
Gross margin						414
Selling and administrative expenses						320
Net operating income						94
Nonoperating items:
Loss on sale of land	$	(11	)
Gain on sale of investments		15				4
Income before taxes						98
Income taxes						38
Net income					$	60

The company’s beginning cash balance was $108 and its ending balance was $98.

Required:

1. Use the indirect method to determine the net cash provided by operating activities for the year. (Adjustment amounts that are to be deducted should be indicated with a minus sign.)

2. Prepare a statement of cash flows for the year. (List any deduction in cash and cash outflows as negative amounts.)

Answer 1

1.

Net cash provided by operating activities:
Net income	$60
Adjustments to reconcile net income:
Depreciation	52
Loss on sale of land	11
Gain on sale of investments	-15
Accounts receivable	-14
Inventory	38
Prepaid expenses	-9
Accounts payable	32
Accrued liabilities	-14
Income tax payable	19
Net cash provided by operating activities	$160

2.

PAVOLIK COMPANY Statement of Cash Flow
Operating activities:
Net cash provided by operating activities		$160
Investing activities:
Proceeds from sale of long term investments	26
Proceeds from sale of land	14
Purchase of property, plant and equipment ($245+25)	-270
Net cash provided by investing activities		-230
Financing activities:
Purchase of common stock	-56
Proceeds from issue of bonds payable	124
Payment of dividend	-8
Net cash provided by financing activities		60
Increase (decrease) in cash		-10
Beginning cash balance		108
Ending cash balance		$98