Question

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.25 million in long-term debt, $730,000 in the common stock account, and $5.9 million in the additional paid-in surplus account. The 2018 balance sheet showed $4.2 million, $965,000, and $8.5 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $240,000. The company paid out $570,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $770,000, and the firm reduced its net working capital investment by $205,000, what was the firm's 2018 operating cash flow, or OCF?

Answer 1

Answer:

Net New Borrowings = Long Term Debt, 2018 - Long Term Debt, 2017
Net New Borrowings = $4,200,000 - $2,250,000
Net New Borrowings = $1,950,000

Cash Flow to Creditors = Interest Paid - Net New Borrowings
Cash Flow to Creditors = $240,000 - $1,950,000
Cash Flow to Creditors = -$1,710,000

Net New Equity = (Common Stock, 2018 + Additional Paid in Surplus, 2018) - (Common Stock, 2017 + Additional Paid in Surplus, 2017)
Net New Equity = ($965,000 + $8,500,000) - ($730,000 + $5,900,000)
Net New Equity = $2,835,000

Cash Flow to Stockholders = Dividend Paid – Net New Equity
Cash Flow to Stockholders = $570,000 - $2,835,000
Cash Flow to Stockholders = -$2,265,000

Cash Flow to Assets = Cash Flow to Creditors + Cash Flow to Stockholders
Cash Flow to Assets = (-$1,710,000) + (-$2,265,000)
Cash Flow to Assets = -$3,975,000

Cash Flow to Assets = Operating Cash Flow - Change in NWC - Net Capital Spending
-$3,975,000 = Operating Cash Flow - (-$205,000) - $770,000
Operating Cash Flow = -$3,410,000