Question

The December 31, 2018, balance sheet of Whelan, Inc., showed long-term debt of $1,455,000, $151,000 in the common stock account, and $2,760,000 in the additional paid-in surplus account. The December 31, 2019, balance sheet showed long-term debt of $1,690,000, $161,000 in the common stock account and $3,060,000 in the additional paid-in surplus account. The 2019 income statement showed an interest expense of $99,500 and the company paid out $156,000 in cash dividends during 2019. The firm’s net capital spending for 2019 was $1,070,000, and the firm reduced its net working capital investment by $136,000.

What was the firm's 2019 operating cash flow, or OCF? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1

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]

= $99,500 – [$1,690,000 - $1,455,000]

= $99,500 - $235,000

= -$135,500

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)

= $156,000 – [($161,000 + $3,060,000) – ($151,000 + $2,760,000)]

= $156,000 – [$3,221,000 - $2,911,000]

= $156,000 - $310,000

= -$154,000

Cash Flow from assets

Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders

= -$135,000 - $154,000

= -$289,500

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

-$289,500 = Operating cash flow – (-$136,000) - $1,070,000

Operating cash flow = -$289,500 - $136,000 + $1,070,000

Operating cash flow = $644,500

“Therefore, the firm’s 2019 operating cash flow or OCF will be $644,500”