The income statement and additional data of Newman Travel​ Products, Inc.,​ follow:

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:
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.

Newman Travel Products, Inc.
	Statement of Cash Flows (Indirect Method)
	Year Ended December 31, 2018
	Cash flows from operating activities:
	Net income
	Adjustments to reconcile net income to
	net cash provided by (used for) operating activities:
	Depreciation
	Decrease in accounts receivable
	Decrease in inventory
	Increase in prepaid expenses
	Increase in accounts payable
	Decrease in accrued liabilities
	Net cash provided by (used for) operating activities

Now enter the

amounts

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.)

	Newman Travel Products, Inc.
	Statement of Cash Flows (Indirect Method)
	Year Ended December 31, 2018
	Cash flows from operating activities:
	Net income		$45,400
	Adjustments to reconcile net income to
	net cash provided by (used for) operating activities:
	Depreciation	$21,000
	Decrease in accounts receivable	14,000
	Decrease in inventory	21,000
	Increase in prepaid expenses	(400)
	Increase in accounts payable	18,000
	Decrease in accrued liabilities	(63,000)	10,600
	Net cash provided by (used for) operating activities		56,000

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.)

	Newman Travel Products, Inc.
	Statement of Cash Flows (Indirect Method)
	Year Ended December 31, 2018
	Cash flows from operating activities:
	Net income		$45,400
	Adjustments to reconcile net income to
	net cash provided by operating activities:
	Depreciation	$21,000
	Decrease in accounts receivable	14,000
	Decrease in inventory	21,000
	Increase in prepaid expenses	(400)
	Increase in accounts payable	18,000
	Decrease in accrued liabilities	(63,000)	10,600
	Net cash provided by (used for) operating activities		56,000

	Cash flows from investing activities:
	Acquisition of plant assets	$(160,000)
	Proceeds from sale of land	79,000
	Net cash provided by (used for) investing activities		(81,000)

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.)

	Newman Travel Products, Inc.
	Statement of Cash Flows (Indirect Method)
	Year Ended December 31, 2018
	Cash flows from operating activities:
	Net income		$45,400
	Adjustments to reconcile net income to
	net cash provided by operating activities:
	Depreciation	$21,000
	Decrease in accounts receivable	14,000
	Decrease in inventory	21,000
	Increase in prepaid expenses	(400)
	Increase in accounts payable	18,000
	Decrease in accrued liabilities	(63,000)	10,600
	Net cash provided by (used for) operating activities		56,000

	Cash flows from investing activities:
	Acquisition of plant assets	$(160,000)
	Proceeds from sale of land	79,000
	Net cash provided by (used for) investing activities		(81,000)

	Cash flows from financing activities:
	Proceeds from issuance of common stock	$80,000
	Payment of long-term note payable	(14,000)
	Payment of dividends	(13,000)
	Net cash provided by (used for) financing activities		53,000

​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.

	Newman Travel Products, Inc.
	Statement of Cash Flows (Indirect Method)
	Year Ended December 31, 2018
	Cash flows from operating activities:
	Net income		$45,400
	Adjustments to reconcile net income to
	net cash provided by operating activities:
	Depreciation	$21,000
	Decrease in accounts receivable	14,000
	Decrease in inventory	21,000
	Increase in prepaid expenses	(400)
	Increase in accounts payable	18,000
	Decrease in accrued liabilities	(63,000)	10,600
	Net cash provided by (used for) operating activities		56,000

	Cash flows from investing activities:
	Acquisition of plant assets	$(160,000)
	Proceeds from sale of land	79,000
	Net cash provided by (used for) investing activities		(81,000)

	Cash flows from financing activities:
	Proceeds from issuance of common stock	$80,000
	Payment of long-term note payable	(14,000)
	Payment of dividends	(13,000)
	Net cash provided by (used for) financing activities		53,000

	Net increase (decrease) in cash		$28,000
	Cash balance, December 31, 2017		47,000
	Cash balance, December 31, 2018		$75,000
	Noncash investing and financing activities:
	Acquisition of plant assets by issuing a note payable		$42,000

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