Financial MGT

The following changes took place last year in Pavolik Company’s balance sheet accounts:
Asset and Contra-Asset Accounts Liabilities and Equity Accounts

Cash . . . . . . . . . . . . . . . . . . . . . . $5 D Accounts payable . . . . . . . . . . . . $35 I
Accounts receivable . . . . . . . . . . $110 I Accrued liabilities . . . . . . . . . . . . $4 D

Inventory . . . . . . . . . . . . . . . . . . . $70 D Income taxes payable . . . . . . . . . $8 I
Prepaid expenses . . . . . . . . . . . . $9 I Bonds payable . . . . . . . . . . . . . . $150 I

Long-term investments . . . . . . . . $6 D Common stock . . . . . . . . . . . . . . $80 D
Property, plant, and equipment . $185 I Retained earnings . . . . . . . . . . . . $54 I
Accumulated depreciation . . . . . $60 I
D=Decrease; I = Increase
Long-term investments that had cost the company $6 were sold during the year for $16 and land that
had cost $15 was sold for $9. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 400
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Selling and administrative expenses . . . . . . . . . . 184
Net operating income . . . . . . . . . . . . . . . . . . . . . 116
Non-operating items:
Loss on sale of land . . . . . . . . . . . . . . . . . . . . . $(6)
Gain on sale of investments . . . . . . . . . . . . . . 104
Income before taxes . . . . . . . . . . . . . . . . . . . . . . 120
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84
The company’s beginning cash balance was $90 and its ending balance was $85.
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.
Question 2
A) What is the difference between trading securities and available for sale securities?
B) Describe how marketable securities are reported in the balance sheet and income statement?
Shown below are selected data from the financial statements of Ahmed Stores, a retail lighting store:
From the balance sheet:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Plant assets (net of accumulated depreciation) . . . . . . . . . . . . . . . . . . . . . . . 50,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,30,000
Page 1 of 2
From the income statement:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,40,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,80,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,500
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
From the statement of cash flows:
Net cash provided by operating activities
(including interest paid of $7,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(5,000)
Financing activities:
Amounts borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
Repayment of amounts borrowed . . . . . . . . . . . . . . . . . . . . . . (2,000)
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,000)
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . . ……8,000
Net increase in cash during the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000
Instructions
a. Compute the following (round to one decimal place):
1. Current ratio 3. Working capital
2. Quick ratio 4. Debt ratio
b. Comment on these measurements and evaluate Ahmed’s short-term debt-paying ability.
c. Compute the following ratios (assume that the year-end amounts of total assets and total stock
holders’ equity also represent the average amounts throughout the year):
1. Return on assets
2. Return on equity
d. Comment on the company’s performance under these measurements. Explain why the return on
assets and return on equity are so different?
Page 2 of 2

Financial MGT

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Financial MGT

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The following changes took place last year in Pavolik Company’s balance sheet accounts:

Asset and Contra-Asset Accounts Liabilities and Equity Accounts

Accounts receivable . . . . . . . . . . $110 I Accrued liabilities . . . . . . . . . . . . $4 D

Prepaid expenses . . . . . . . . . . . . $9 I Bonds payable . . . . . . . . . . . . . . $150 I

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