Question

LO 3 E11-30B. (Learning Objective 3: Prepare the statement of cash flows-indirect method) The income statement and additional data of Casey Travel Products, Inc., follow: AL $ 239,000 8,500 $ 247,500 Casey Travel Products, Inc. Income Statement Year Ended December 31, 2018 2 Revenues: 3 Service revenue 4 Dividend revenue 5 Expenses 6 Cost of goods sold Salary expense Depreciation expense Advertising expense Interest expense Income tax expense Net income 100,000 54,000 26,000 4.600 2,500 12.000 199 100 48.400 $

Answer 1

Casey Travel Products, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash Flows from Operating Activities
Net income		$ 48,400
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	$ 26,000
(Increase) decrease in current assets:
Accounts receivable	$ 18,000
Inventory	$ 22,000
Prepaid expenses	$ (1,100)
Increase (decrease) in current liabilities:
Accounts payable	$ 20,000
Accrued liabilities	$ (58,000)
		$ 26,900
Net cash provided by operating activities		$ 75,300
Cash Flows from Investing Activities
Purchase of plant assets	$ (1,02,000)
Sale of land	$ 45,000
Net cash used by investing activities		$ (57,000)
Cash Flows from Financing Activities
Issue of common stock	$ 80,000
Payment of long-term note payable	$ (18,000)
Payment of dividends	$ (14,000)
Net cash provided by financing activities		$ 48,000
Net Increase in Cash		$ 66,300
Beginning cash balance		$ 8,700
Ending cash balance		$ 75,000
Supplemental disclosures of cash flow information:
Cash paid during the year for interest		$ 2,500
Cash paid during the year for income taxes		$ 12,000
Non-cash Investing and Financing Activites
Acquisition of plant assets by issuing note payable		$ 51,000

Evaluation of cash flows

• Cash flow statement shows the movement of cash flows through a company.
• Cash Flows from Operating Activities
  • It shows the cash generated from or used by the business activities of the company. i.e. it shows the cash generated from the supply of goods and services.
  • Casey Travel Products has generated high cash profit from its operations.
  • The company made a profit from operations amounting to $48,400. However, the cash profit from operating activities is $75,300. This implies, the company is effectively managing is its inventory and receivables. The company is promptly recovering its operational debts and there is no buildup of inventory.
  • The high cash profit implies that the company is able to meet its operating expenses including taxes and interest without resorting to raising additional debts or selling assets or issuing debt or equity.
• Cash Flows from Investing Activities
  • It shows the cash flow related to non-current assets.
  • The company has a negative cash flow from investing activities. However, this is due to purchase of plant assets. This can significantly add to the growth potential of the company. The plant asset can use the plant assets to enhance the level of future operations.
  • The company has sold its land. The company may need to rent premises for its operations. This would lead to lease obligations and rental expenses.
• Cash Flows from Financing Activities
  • ​​​​​​​The company has generated $48,000 from financing activities.
  • It has issued common stock amounting to $80,000.
  • The company should be careful while issuing common shares more than required since issuing common shares will lead to more number of shareholders and thereby leads to possible dilution of control and future higher dividend payments.
  • Further, the company has generated a healthy cash profit from its operations and the company should consider this while raising equity finance.