Question

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.9 million in long-term debt, $740,000 in the common stock account, and $5.95 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.95 million, $935,000, and $8.2 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $210,000. The company paid out $700,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $750,000, and the firm reduced its net working capital investment by $205,000, what was the firm's 2018 operating cash flow, or OCF?

Answer 1

Cash flow to shareholders = Dividends paid - Net new equity

= $700,000 - [($935,000 + $8,200,000) - ($740,000 + $5,950,000)]

= $700,000 - [$9,135,000 - $6,690,000]

= $700,000 - $2,445,000 = -$1,745,000

Cash Flow to creditors = Interest Paid - Net new borrowings

= $210,000 - [$3,950,000 - $2,900,000] = $210,000 - $1,050,000 = -$840,000

Cash Flow from Assets = Cash Flow to shareholders + Cash Flow to creditors

= -$1,745,000 + (-$840,000) = -$2,585,000

CFFA = OCF - NFA - Addition to NWC

-$2,585,000 = OCF - $750,000 - (-$205,000)

-$2,585,000 = OCF - $545,000

OCF = -$2,585,000 + $545,000 = -$2,040,000