Question

Exercise 2: Following information is extracted from the books of Brox Ltd: a. Current Accounts  2017: CA = 18,900; CL = 11,300  2016: CA = 14,700; CL = 11,600 b. Fixed Assets and Depreciation  2017: NFA = 88,100; 2016: NFA = 85,700  Depreciation Expense = 1500 c. Long-term Debt and Equity (R.E. not given)  2017: LTD = 17,000; Common stock & APIC = 1,400  2016: LTD = 15,650; Common stock & APIC = 1,400 d. Income Statement  EBIT = 16,000; Taxes = 1400  Interest Expense = 1,240; Dividends = 1,700 Required: i. Compute the cash flow from asset for Brox Ltd. ii. Comment on usefulness of cash flow from asset in financial decision making.

Answer 1

i). Cash Flow From Assets (CFFA) = Operating Cash flow (OCF) - Net Capital Spending (NCS) - Change in Net Working Capital (NWC)

OCF = EBIT + Depreciation - Tax

= 16,000 + 1,500 - 1,400 = 16,100

NCS: Ending NFA - Beginning NFA + depreciation = 88,100 - 85,700 + 1,500 = 3,900

Change in NWC: Ending WC - Beginning WC = Ending(CA - CL) - Beginning(CA - CL)

= (18,900 - 11,300) - (14,700 - 11,600) = 4,500

CFFA = 16,100 - 3,900 - 4,500 = 7,700

ii). CFFA is an important metric in financial decision making as it helps in deciding how much funds are required for running the business or further expansion, whether the company is generating enough funds from its assets or does it need to invest in more assets.