Question

Problem 2-10 Calculating Cash Flows The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed long-term debt of $5.2 million, and the 2015 balance sheet showed long-term debt of $5.45 million. The 2015 income statement showed an interest expense of $170,000. The 2014 balance sheet showed $520,000 in the common stock account and $5.5 million in the additional paid-in surplus account. The 2015 balance sheet showed $560,000 and $5.7 million in the same two accounts, respectively. The company paid out $415,000 in cash dividends during 2015. Suppose you also know that the firm’s net capital spending for 2015 was $1,380,000, and that the firm reduced its net working capital investment by $71,000. What was the firm’s 2015 operating cash flow, or OCF? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Operating cash flow $

Answer 1

Cash flow to creditors = Interest expense – Increase in borrowings

= 170,000 - (5,450,000 - 5,200,000)

= 170,000 - 250,000

= - $80,000

Cash flow to stockholders = Dividend paid – (Ending common stock – Beginning common stock) – (Ending capital surplus – Beginning capital surplus)

= 415,000 - (560,000 - 520,000) - (5,700,000 - 5,500,000)

= 415,000 - 40,000 - 200,000

= $175,000

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

= - 80,000 + 175,000

= $95,000

Cash flow from assets = Operating cash flow – Capital spending + Reduction in net working capital

95,000 = Operating cash flow - 1,380,000 + 71,000

Operating cash flow = $1,404,000