Question

The 2017 balance sheet of Kerber's Tennis Shop, Inc., showed $3 million in long-term debt, $700,000 in the common stock account, and $6.1 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.55 million, $915,000, and $8 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $380,000. The company paid out $600,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $750,000 and the firm reduced its net working capital investment by $185,000, what was the firm's 2018 operating cash flow, or OCF?

A. $-1,685,000

B. $-3,450,000

C. $-1,120,000

D. $-2,320,000

E. $2,055,000

Answer 1

Answer is -$1,120,000

Net New Long-term Debt = Long-term Debt, 2018 - Long-term Debt, 2017
Net New Long-term Debt = $3,550,000 - $3,000,000
Net New Long-term Debt = $550,000

Cash Flow to Creditors = Interest Expense - Net New Long-term Debt
Cash Flow to Creditors = $380,000 - $550,000
Cash Flow to Creditors = -$170,000

Net New Equity = Common Stock, 2018 + Additional Paid-in Surplus, 2018 - Common Stock, 2017 - Additional Paid-in Surplus, 2017
Net New Equity = $915,000 + $8,000,000 - $700,000 - $6,100,000
Net New Equity = $2,115,000

Cash Flow to Stockholders = Dividends - Net New Equity
Cash Flow to Stockholders = $600,000 - $2,115,000
Cash Flow to Stockholders = -$1,515,000

Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders
Cash Flow from Assets = -$170,000 - $1,515,000
Cash Flow from Assets = -$1,685,000

Cash Flow from Assets = Operating Cash Flow - Net Capital Spending - Net Increase in NWC
-$1,685,000 = Operating Cash Flow - $750,000 - (-$185,000)
Operating Cash Flow = -$1,120,000