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	$	12	D	Accounts payable	$	42	I
Accounts receivable	$	145	I	Accrued liabilities	$	4	D
Inventory	$	70	D	Income taxes payable	$	15	I
Prepaid expenses	$	16	I	Bonds payable	$	136	I
Long-term investments	$	13	D	Common stock	$	59	D
Property, plant, and equipment	$	171	I	Retained earnings	$	54	I
Accumulated depreciation	$	53	I

D = Decrease; I = Increase.

Long-term investments that cost the company $13 were sold during the year for $23 and land that cost $22 was sold for $16. In addition, the company declared and paid $30 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					$	680
Cost of goods sold						400
Gross margin						280
Selling and administrative expenses						184
Net operating income						96
Nonoperating items:
Loss on sale of land	$	(6	)
Gain on sale of investments		10				4
Income before taxes						100
Income taxes						30
Net income					$	70

The company’s beginning cash balance was $111 and its ending balance was $99.

Required:

Use the direct method to convert the company's income statement to a cash basis. (Adjustment amounts that are to be deducted should be indicated with a minus sign.)

Answer 1

Pavolik Company Direct Method of Determining the Net Cash Flows from Operating Activitites Sales $680 Adjustments to a cash basis: Increase in Accounts receivable $145 $535 $400 Cost of Goods Sold Adjustments to a cash basis: Decreas in Inventory Increase in Accounts payable $70 $42 $288 $184 Selling & Administrative Expenses Adjustments to a cash basis: Increase in Accumulated depreciation Increase in Prepaid expenses Decrease in Accrued liabilities $53 $16 $4 $151 -$30 Income Taxes Adjustments to a cash basis: Increase in Income taxes payable $15 -$15 Net Cash Flows from Operating Activities $81