Question

Graffiti Advertising, Inc., reported the following financial statements for the last two years.

2019 Income Statement
Sales	$	565,200
Costs of goods sold		274,025
Selling & administrative		124,733
Depreciation		54,576
EBIT	$	111,866
Interest		19,296
EBT	$	92,570
Taxes		48,137
Net income	$	44,433
Dividends	$	9,600
Addition to retained earnings	$	34,833

GRAFFITI ADVERTISING, INC. Balance Sheet as of December 31, 2018
Cash	$	13,320	Accounts payable	$	9,504
Accounts receivable		18,994	Notes payable		14,508
Inventory		13,794
			Current liabilities	$	24,012
Current assets	$	46,108	Long-term debt	$	136,800
Net fixed assets	$	344,426	Owners' equity	$	229,722
Total assets	$	390,534	Total liabilities and owners’ equity	$	390,534

GRAFFITI ADVERTISING, INC. Balance Sheet as of December 31, 2019
Cash	$	14,306	Accounts payable	$	10,512
Accounts receivable		21,099	Notes payable		16,466
Inventory		22,754
			Current liabilities	$	26,978
Current assets	$	58,159	Long-term debt	$	152,000
Net fixed assets	$	406,311	Owners' equity	$	285,492
Total assets	$	464,470	Total liabilities and owners’ equity	$	464,470

a.	Calculate the operating cash flow. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
b.	Calculate the change in net working capital. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
c.	Calculate the net capital spending. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
d.	Calculate the cash flow from assets. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
e.	Calculate the cash flow to creditors. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
f.	Calculate the cash flow to stockholders. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

Solution:
a.	Operating Cash Flow          $118,305
Working Notes:
Notes:	Operating cash flow is shows the real cash flow generated for the period , and to get Operating cash flow we do is net income and addition of non cash expenses . Depreciation is non cash expenses for the firm. OCF = EBIT + Depreciation - taxes
	Operating Cash flow = EBIT + Depreciation - Taxes
	= 111,866 + 54,576 - 48,137
	= $118,305
b.	Change in Net Working Capital $9,085
Working Notes:
	we get the addition to NWC , which is also called it change in NWC,
	Change in Net Working Capital =Net working capital 2019 - Net working capital 2018
	=(current asset 2019 - current liabilities 2019) - (current asset 2018- current liabilities 2018)
	=($58,159 - 26,978) - (46,108 - 24,012)
	=$31,181 - $22,096
	=$9,085
c.	Net capital spending   $116,461
Working Notes:
	Net capital spending = Depreciation + Increase in fixed assets
	Net capital spending = Depreciation + (net fixed assets 2019 - net fixed assets 2018)
	Net capital spending = 54,576 + (406,311 - 344,426)
	Net capital spending = 54,576 + 61,885
	Net capital spending = $116,461
d.	Cash flow from assets       $ -7,241
Working Notes:
	Cash flow from assets = Operating cash flow - Change in NWC - Net capital spending
	Cash flow from assets = $118,305 - $9,085 - $116,461
	Cash flow from assets =    -$7,241
e.	Cash flow to creditors              $   4,096
Working Notes:
	Cash flow to creditors = Interest paid –New long-term debt
	Cash flow to creditors = Interest paid –(Long-term debt 2019 - Long-term debt 2018)
	Cash flow to creditors = $19,296 - ($152,000 -$136,800)
	Cash flow to creditors = $19,296 - $15,200
	Cash flow to creditors = $4,096
f.	Cash flow to Stockholders      $ -11,337
Working Notes:
	cash flow to stockholders is how much net cash gone to stockholders during the period , which we compute as follows:
	Cash flow to Stockholders      = Dividends - Net new equity
	Cash flow to Stockholders      = 9,600 - 20,937
	Cash flow to Stockholders      = -11,337
	New equity = 2019 equity - 2018 equity - Addition to retained earnings 2019
	New equity = $285,492 - $229,722 -34,833
	New equity = 20,937
Notes:	lets check our above calculation are correct.
	Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
	-$7,241 = $4,096 -11,337
	-$7,241 = -$7,241
	Please feel free to ask if anything about above solution in comment section of the question.