You are given the following information: 2018 Sales $23,000 Cost of goods sold $16,000 Depreciation expense...

You are given the following information: 2018
Sales	$23,000
Cost of goods sold	$16,000
Depreciation expense	$4,000
Interest	$1,800
Dividends	$1,300
Tax rate	35%
New debt issuance	$2,000

2017	2018
Current assets	$4,800	$5,900
Current liabilities	$2,700	$3,200
Net fixed assets	$14,000	$17,000

a. Calculate the operating cash flow for 2018. (Hint: Taxes = Earnings before taxes x Tax rate) (show your work)

b. Calculate the cash flow from assets for 2018. (show your work )

c. Calculate the cash flow to creditors and the cash flow to shareholders for 2018. (show your work)

Solutions

Expert Solution

In order to calculate operating cash flow, first we need to calculate net profit in order to calculate taxes..

Net Profit = 23000-16000-4000-1800 = $1,200

Taxes = 1,200 *0.35 = $420.

Now, we will get operating cash flow as :- Revenue- COGS - Taxes- Increase in Current assets + Increase in current liabilities

i.e 23,000-16,000-420-(5,900-.4,800) + (3,200-2,700) = $5,980.

2) Our asset consist of Current assets and fixed asset.

We know current asset increased from 4,800 t0 5,900 which means we invested 1,100 in current assets.

Our opening fixed asset was 14,000 of which 4,000 got depreciated and we had a closing balance of 17,000 which means fixed asset increased by 7,000 i.e. investment in fixed asset.

So, total cash flow from asset is 1,100 + 4,000 = $5,100 cash used in assets.

c) We know current liabilities i.e. creditors increased from 2,700 to 3,200 which means creditors increased by 500 which symbolises we had generated money from creditors which needs to be paid at a later period. So, cash flow from creditors is $500.

To calculate Cash flow to share holder we need to calculate Free cash flow to share holders which is Net profit - taxes + Depreciation - Debt issuance - Investment in Current assets and fixed assets + Increase in Current liabilities

i.e 1,200-480 + 4000 - 2,000 - 1,100 - 7,000 + 500 = (4,820) i.e. negative cash flow of 4,820 for shareholders.

jeff jeffy answered 1 year ago

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