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 $ 6 D Accounts payable $ 20 I Accounts receivable $ 10 I Accrued liabilities $ 10 D Inventory $ 30 D Income taxes payable $ 15 I Prepaid expenses $ 5 I Bonds payable $ 97 I Long-term investments $ 7 D Common stock $ 40 D Property, plant, and equipment $ 180 I Retained earnings $ 30 I Accumulated depreciation $ 40 I D = Decrease; I = Increase. Long-term investments costing $7 were sold for $18 and land costing $17 was sold for $10. In addition, the company paid $14 in cash dividends. 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 or issue common stock. The company’s income statement for the year follows: Sales $ 600 Cost of goods sold 250 Gross margin 350 Selling and administrative expenses 280 Net operating income 70 Nonoperating items: Loss on sale of land $ (7) Gain on sale of investments 11 4 Income before taxes 74 Income taxes 30 Net income $ 44 The company’s beginning cash balance was $100 and its ending balance was $94. Required: Use the indirect method to determine the net cash provided by operating activities. Prepare a statement of cash flows.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
The following changes took place last year in Pavolik Company’s
| Asset and Contra-asset Accounts | Liabilities and |
||||
|---|---|---|---|---|---|
| Cash and cash equivalents | $ 6 | D | Accounts payable | $ 20 | I |
| $ 10 | I | Accrued liabilities | $ 10 | D | |
| Inventory | $ 30 | D | Income taxes payable | $ 15 | I |
| Prepaid expenses | $ 5 | I | Bonds payable | $ 97 | I |
| Long-term investments | $ 7 | D | Common stock | $ 40 | D |
| Property, plant, and equipment | $ 180 | I | $ 30 | I | |
| $ 40 | I |
D = Decrease; I = Increase.
Long-term investments costing $7 were sold for $18 and land costing $17 was sold for $10. In addition, the company paid $14 in cash dividends. 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 or issue common stock.
The company’s income statement for the year follows:
| Sales | $ 600 | |
|---|---|---|
| Cost of goods sold | 250 | |
| Gross margin | 350 | |
| Selling and administrative expenses | 280 | |
| Net operating income | 70 | |
| Nonoperating items: | ||
| Loss on sale of land | $ (7) | |
| Gain on sale of investments | 11 | 4 |
| Income before taxes | 74 | |
| Income taxes | 30 | |
| Net income | $ 44 |
The company’s beginning cash balance was $100 and its ending balance was $94.
Required:
- Use the indirect method to determine the net cash provided by operating activities.
- Prepare a statement of
cash flows.
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