In: Finance
The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.15 million in long-term debt, $700,000 in the common stock account, and $6.3 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.75 million, $975,000, and $8.45 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $280,000. The company paid out $690,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $760,000, and the firm reduced its net working capital investment by $145,000, what was the firm's 2018 operating cash flow, or OCF?
Cash Flow to Creditors
Cash Flow to Creditors = Interest Expenses Paid – Net Increase in Long term debt
= Interest Expenses Paid – [Long term debt at the end – Long term Debt at the Beginning]
= $280,000 – [$3,750,000 - $2,150,000]
= $280,000 - $1,600,000
= -$1,320,000
Cash Flow to Stockholders
Cash Flow to Stockholders = Dividend Paid – Net New Equity
= 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)
= $690,000 – [($975,000 + $8,450,000) – ($700,000 + $6,300,000)]
= $690,000 – [$9,425,000 - $7,000,000]
= $690,000 - $2,425,000
= -$1,735,000
Cash Flow from assets
Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders
= -$1,320,000 - $1,735,000
= -$3,055,000
Operating Cash Flow
Operating Cash Flow using the Cash Flow from assets Equation
We know, Cash flow from assets = Operating Cash flows – Change in Net Working capital – Net Capital Spending
-$3,055,000 = Operating cash flow – (-$145,000) - $760,000
Operating cash flow = -$3,055,000 - $145,000 + $760,000
Operating cash flow = -$2,440,000 (Negative)
“Therefore, the firm's 2018 operating cash flow, or OCF will be -$2,440,000 (Negative)”