Question

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?

Answer 1

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