Question

# The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed \$2.7 million in long-term debt, \$770,000...

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed \$2.7 million in long-term debt, \$770,000 in the common stock account, and \$6.4 million in the additional paid-in surplus account. The 2018 balance sheet showed \$3.85 million, \$955,000, and \$7.8 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of \$340,000. The company paid out \$620,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was \$840,000, and the firm reduced its net working capital investment by \$185,000, what was the firm's 2018 operating cash flow, or OCF?

Cash Flow to Creditors = Interest Expenses – (Long term debt at the end – Long term debt at the beginning)
= \$340,000 - (\$3,850,000 - \$2,700,000)
= \$340,000 - \$1,150,000
= -\$810,000

Cash Flow to Stockholders = Dividend Paid – [(Common stock at the end + Additional paid-in surplus account at the end) - (Common stock at the beginning + Additional paid-in surplus account at the beginning)
= \$620,000 - ((\$955,000 + \$7,800,000) - (\$770,000 + \$6,400,000))
= \$620,000 - \$1,585,000
= -\$965,000

Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders
= -\$810,000 + (-\$965,000)
= -\$1,775,000

Cash flow from assets = Operating Cash flows - Change in Net Working capital - Net Capital Spending
-\$1,775,000 = Operating Cash flows - (-\$185,000) - \$840,000
Operating cash flow = -\$1,775,000 - \$185,000 + \$840,000

Operating cash flow = -\$1,120,000