Question

You are given the following past information and assume the tax rate to be 45%

	2018	2017
( $ )
Net sales	10,500	9,800
Depreciation	200	160
Dividend paid	100	70
	End of 2018	End of 2017
Cash & m/s	650	580
Accounts receivable	1,000	930
Accounts payable	600	540
Inventory	1,100	1,070
Notes payable	180	130
Long term debt	4,000	3,800
Common shares	2,500	2,400
Net fixed assets	8,000	7,700

The cash flow from investments is:

The cash flow from financing is:

Net earnings ( NE ) in 2018 is:

Answer 1

Cash flow from investing will include only transaction of fixed assets. Net fixed assets increased from $7,700 to $8,000, so we can understand that, there is purchase of fixed asset. So, there is cash outflow.

Cash flow from investing is: ($300)

Cash flow from financing will involve all transactions in relation to borrowing external funds to finance the business. This includes debt and shareholder equity. Dividend paid (cash outflow) of $100 is financing activity. Long term debt has increased from $3,800 to $4,000, which means there was fresh borrowed (cash inflow) of $200. Common shares have increased from $2,400 to $2,500, which means new shares were issued (cash inflow) of $100.

Cash flow from financing is: ($100) + $200 + $100 = $200

For calculating net earnings first we should calculate cash flow from operations

Net increase in cash = $650 - $580 = $70

Net increase in cash = Cash flow from operations + Cash flow from Investing + Cash flow from Financing

Cash flow from operations = $70 + $300 - $200 = $170

Cash flow from operations = Net earnings + Depreciation + Increase in accounts payable + Increase in notes payable - Increase in accounts receivable - increase in Inventory

Cash flow from operations = Net earnings + $200 + $60 + $50 - $70 - $30 = Net earnings + $210

Net earnings = ($40)