Question

The 2018 balance sheet of Speith’s Golf Shop, Inc., showed long-term debt of $2.7 million, and the 2019 balance sheet showed long-term debt of $2.95 million. The 2019 income statement showed an interest expense of $140,000. The 2018 balance sheet showed $460,000 in the common stock account and $3.2 million in the additional paid-in surplus account. The 2019 balance sheet showed $500,000 and $3.5 million in the same two accounts, respectively. The company paid out $500,000 in cash dividends during 2019. Suppose you also know that the firm’s net capital spending for 2019 was $1,320,000, and that the firm reduced its net working capital investment by $59,000. What was the firm’s 2019 operating cash flow, or OCF?

Answer 1

Cash flow to creditors = Interest expenses - (Net increase in long term debt)

= Interest expenses paid - (Long term debt at the end - Long term the beginning)

= $140,000 - ($2,950,000 - $2,700,000)

= $140,000 - $250,000

= -$110,000

Cash flow to Stockholders

Cash flow to Stockholders = Dividend paid - [(Common stock at the end + Additional paid in surplus accounts at the end) -(Common stock at the beginning + Additional paid in surplus account at the beginning)

= $500,000 - [($500,000 + $3,500,000) - ($400,000 + $3,200,000)]

= $500,000 - $340,000

= $160,000

Cash flow from assets

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

= -$110,000 + $160,000

= $50,000

Operating cash flow

Cash flow from assets = Operating cash flow - Change in net working capital - Net capital spending

$50,000 =  Operating cash flow - (-$59,000) - $1,320,000

Operating cash flow = $1,311,000