Question

Robison Manufacturing had the following operating results for 2017: sales = $40,000; cost of goods sold = $25,000; depreciation expense = $3,200; interest expense = $500; dividends paid = $800. At the beginning of the year, net fixed assets were $22,000, current assets were $3,400, and current liabilities were $2,800. At the end of the year, net fixed assets were $28,000, current assets were $4,200, and current liabilities were $2,100. The tax rate for 2017 was 40 percent. What is net income for 2017? What is the operating cash flow during 2017? What is the cash flow from assets during 2017? What is the cash flow to creditors during 2017? What is the cash flow to stockholders during 2017?

Answer 1

Robison Manufacturing
Income Statement
Sales	40000
Less- Cost of goods sold	25000
Less- Depreciation Expense	3200
EBIT	11800
Less- Interest	500
Taxable Income	11300
Less- tax @40%	4520
Net Income	6780

Operating cash flow During the year 2017 =

OCF = EBIT + Depreciation – Taxes

= 11800 + 3200 - 4520

= 10480

To calculate the cash flow from assets, we also need the change in net working capital and net capital spending. The change in net working capital was:

Change in NWC = NWC_end – NWC_beg

Change in NWC = (CA_end– CL_end) – (CA_beg– CL_beg)

= (4200 - 2100) - ( 3400 - 2800)

= 2100 - 600 = 1500

And the net capital spending was=

Net capital spending = NFA_end – NFA_beg + Depreciation

Net capital spending = $28000 – 22000 + 3200

Net capital spending = $9200

3:So, the cash flow from assets was:

Cash flow from assets = OCF – Change in NWC – Net capital spending

Cash flow from assets = $10480 – 1500 – 9200

Cash flow from assets = –$220

The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in fixed assets and net working capital; it had to raise a net $220 in funds from its stockholders and creditors to make these investments

4: The cash flow to creditors was:

Cash flow to creditors = Interest – Net new LTD

Cash flow to creditors = $500 – 0

Cash flow to creditors = $500

5:

Rearranging the cash flow from assets equation, we can calculate the cash flow to stockholders as:

Cash flow from assets = Cash flow to stockholders + Cash flow to creditors

–$220 = Cash flow to stockholders + $500

Cash flow to stockholders = –$720