Question

For each of the following three transactions by a firm, calculate the effect on each of the following items: “Operating” Cash Flow, ΔNet Working Capital, Net Capital Spending, Cash Flow from Assets, Cash Flow to Creditors, and Cash Flow to Shareholders. If an item is completely unaffected by the transaction, you should not mention the item; however, if an item is affected in multiple ways that have a net effect of $0, you must report the $0. (1) The firm issues $2.3 million of new debt in exchange for cash. (2) The firm depreciates its long-term assets by $5 million. (3) The firm uses cash to pay off $77,000 of accounts payable.

Answer 1

A. ISSUE OF $2.3 MILLION DEBT IN EXCHANGE FOR CASH
Effect on -	Change	Reason
Operating cash flow	No	Since raising money by way of debt is a financing activity, operating cashflows are not affected.
Change in Net working capital	No	No effect on Net working capital
Net capital spending	No	It is the amount spent on acquiring Fixed assets during the year. Raising debt doesnot Impact Net capital spending
Cash flow from assets	No	No effect on Cashflow from assets
Cash flow to creditors	No	No effect on cashflow to Sundry creditors. However, if debtproviders are considered as creditors then cash flow increases
Cash flow to Shareholders	No	Since raising debt involves payment of interest, Share holders have to forego that part of profits. However the question remains silent regarding the coupon payments it may also be assumed to have NIL coupon payments
B. DEPRECIATION OF LONGTERM ASSETS BY $5 MILLION
Effect on -	Change	Reason
Operating cash flow	Yes	Depreciation effect is given in operating cash flows. Depreciation is to be added back to net profit to calculate Operating cash flows
Change in Net working capital	No	No change in working capital due to depreciation of Fixed assets
Net capital spending	Yes	Net Capital Spending = Fixed assets at the end of the year – fixed assets at the beginning of the year + depreciation.
Cash flow from assets	Yes	Depreciation effects Operating cash flows which inturn effects cash flows from assets
Cash flow to creditors	No	No change in cashflows to creditors
Cash flow to Shareholders	No	No change in cashflows to Shareholders
C. PAYMENT OF $77,000 TO ACCOUNTS PAYABLES
Effect on -	Change	Reason
Operating cash flow	No	No change in cashflows to Shareholders
Change in Net working capital	Yes	Accounts payables are part of Current liabilities which is a part of Net working capital.
Net capital spending	No	No change in Net capital spending
Cash flow from assets	No	No effect on Cashflow from assets
Cash flow to creditors	Yes	Payment made to account payables(Creditors), their balance decreases
Cash flow to Shareholders	No	No change in cashflows to Shareholders