The income statement and additional data of Newman Travel Products, Inc., follow:
Requirements
1.
Prepare Newman's statement of cash flows for the year ended December 31, 2018, using the indirect method.
2.
Evaluate the company's cash flows for the year. In your evaluation, mention all three categories of cash flows and give the rationale for your evaluation.
To go from net income to cash flow from operations using the indirect method, we must make some adjustments to net income on the statement of cash flows. These additions and subtractions follow net income and are labeled Adjustments to reconcile net income to net cash used for operating activities.
The indirect method starts with net income, which is then converted to the net cash provided or used by operating activities. The method does so by adjusting for accrual-basis items, such as depreciation, which don?t actually affect cash but do affect net income.
Depreciation does not affect cash. However, depreciation, like all the other expenses, decreases net income. Therefore, to convert net income to cash flow, we add depreciation back to net income.
Changes in the current accounts create adjustments to net income on the cash flow statement, as follows:
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A decrease in a noncash current asset increases cash. Therefore, add decreases in accounts receivable and the other current assets to net income.
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An increase in a noncash current asset decreases cash. It takes cash to acquire assets. Therefore, subtract the increase in the current asset from net income to get cash flow from operations.
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An increase in a current liability increases in cash. Thus, an increase in a current liability is added to net income.
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A decrease in a current liability decreases cash. Therefore, we subtract decreases in current liabilities from net income to get cash flow from operations.
Requirement 1. Prepare Newman's statement of cash flows for the year ended December 31, 2018, using the indirect method.
Begin by selecting the labels for the cash flows from operating activities.
Answer
Requirements
1.
Prepare Newman's statement of cash flows for the year ended December 31, 2018, using the indirect method.
2.
Evaluate the company's cash flows for the year. In your evaluation, mention all three categories of cash flows and give the rationale for your evaluation.
To go from net income to cash flow from operations using the indirect method, we must make some adjustments to net income on the statement of cash flows. These additions and subtractions follow net income and are labeled Adjustments to reconcile net income to net cash used for operating activities.
The indirect method starts with net income, which is then converted to the net cash provided or used by operating activities. The method does so by adjusting for accrual-basis items, such as depreciation, which don?t actually affect cash but do affect net income.
Depreciation does not affect cash. However, depreciation, like all the other expenses, decreases net income. Therefore, to convert net income to cash flow, we add depreciation back to net income.
Changes in the current accounts create adjustments to net income on the cash flow statement, as follows:
times
A decrease in a noncash current asset increases cash. Therefore, add decreases in accounts receivable and the other current assets to net income.
times
An increase in a noncash current asset decreases cash. It takes cash to acquire assets. Therefore, subtract the increase in the current asset from net income to get cash flow from operations.
times
An increase in a current liability increases in cash. Thus, an increase in a current liability is added to net income.
times
A decrease in a current liability decreases cash. Therefore, we subtract decreases in current liabilities from net income to get cash flow from operations.
Requirement 1. Prepare Newman's statement of cash flows for the year ended December 31, 2018, using the indirect method.
Begin by selecting the labels for the cash flows from operating activities.
Now enter the
for the cash flows from operating activities. (Use parentheses or a minus sign for numbers to be subtracted and for a net decrease in cash.)
Investing activities increase and decrease a company's long-term
assets,
such as its computers, land, buildings, equipment, and investments in other companies. Purchases and sales of these assets are investing activities. We are only concerned with how changes in these assets affect cash. How much cash was paid to acquire the assets? Recall that when paying cash, we subtract, and when receiving cash, we add.
Now, complete the cash flows from investing activities. (Use parentheses or a minus sign for numbers to be subtracted and for a net decrease in cash.)
Financing activities are related to a firm's long-term liabilities and stockholders'
equity.
These activities include obtaining cash from investors and creditors by issuing stock and borrowing money. Paying off a loan, buying and selling treasury stock, and paying cash dividends are other examples of financing activities. Recall that when paying cash, we subtract, and when receiving cash, we add.
Complete the cash flows from financing activities. (Use parentheses or a minus sign for numbers to be subtracted and for a net decrease in cash.)
Finally, complete the statement of cash flows by totaling the net increase (decrease) in cash, entering the beginning and ending cash balances and completing the separate section for noncash investing and financing activities.
Requirement 2. Evaluate the company's cash flows for the year. In your evaluation, mention all three categories of cash flows and give the rationale for your evaluation.
When evaluating the statement of cash flows, we must look at all three categories of cash flows. Operating activities are the most important of the three categories because they reflect the core of the organization. A successful business must generate most of its cash from operating activities. Consider the transactions that resulted in the cash flows from investing and financing activities as well. Do these transactions suggest that the business is investing in its future growth? How did the company pay for the investments? Are investors and creditors willing to finance the company?
Answer
