Question

Here are the financial results for Springer’s corporation in 2020: Sales were $45,000, cost of goods sold was $36,000, the company’s assets depreciated by $5,000 and the company paid $500 in interest.

Also, for 2020 net fixed assets were $29,000 while current assets were $10,000 and current liabilities were $5,500.

These are the values for 2019: net fixed assets = $25,500, current assets = $8,800 and current liabilities = $5,000. The tax rate is 35%.

1. What is net income for 2020?
2. What is the operating cash flow for 2020?
3. What is the cash flow from assets for 2020? How do you interpret this result?
4. What is the cash flow to shareholders?

Answer 1

a)  net income for 2020:

Sales	45,000
Less: COGS	(36,000)
Gross Profit	9000
Less: Depreciation	5,000
Operating Profit	4,000
Less: Interest	500
EBIT	3500
Less: Tax @35%	1225

Net Income= $2,275

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b)  the operating cash flow for 2020:

Operating Cash Flow= EBIT + Depreciation - Taxes
= 3500 + 5000 - 1225
= $ 7,275

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c) Cash Flow from Assets = Operating Cash Flow - Change in Net working capital - Net capital spending

So,

Change in Net working capital = Net working capital at the end - Net working capital at the beginning
So,

Net working capital at the end = Current Assets at the end - Current Liabilities at the end
= 10,000 - 5,500
= $4,500

Net working capital at the beginning = Current Assets at the beginning - Current Liabilities at the beginning
= 8,800 - 5,000
= $3,800

Now,

Change in Net working capital= 4,500 - 3,800
= $700

Now,

Net capital spending = Net fixed assets at the end - Net fixed assets at the beginning + Depreciation
= $29,000 - 25,500+ 5,000 = $8,500

So,
Cash flow from assets = Operating Cash Flow - Change in Net Working Capital - Net capital spending
= $7,275- 700- 8,500
= - $1,925

Interpretation: We can interpret from this result is that cash flow from assets is negative which means company has invested heavily on the fixed assets and net working capital. And Cash flow from operations and net income is positive. But a firm need to raise funds either from creditors or shareholders to make investments.

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d) cash flow to shareholders:

Cash flow to shareholders = Cash flow from assets - Cash flow to creditors

so,

Cash flow to creditors= Interest - net borrowing

= $500 - 0 = $500

Cash Flow to shareholders= -1,925 - 500
= -$2,425