Question

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.15 million in long-term debt, $720,000 in the common stock account, and $6.1 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.65 million, $935,000, and $8.55 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $290,000. The company paid out $520,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $730,000, and the firm reduced its net working capital investment by $185,000, what was the firm's 2018 operating cash flow, or OCF?

Multiple Choice

A. $3,725,000

B. $-2,810,000

C. $-3,355,000

D. $-3,850,000

E. $-4,940,000

Answer 1

Cash Flow to Creditors

Cash Flow to Creditors = Interest Expenses Paid – Net Increase in Long term debt

= Interest Expenses Paid – [Long term debt at the end – Long term Debt at the Beginning]

= $290,000 – [$36,50,000 – $21,50,000]

= $290,000 - $15,00,000

= -$12,10,000

Cash Flow to Stockholders

Cash Flow to Stockholders = Dividend Paid – Net New Equity

= Dividend Paid – [(Common stock at the end + Additional paid-in surplus account at the end) - (Common stock at the beginning + Additional paid-in surplus account at the beginning)

= $520,000 – [($935,000 + $85,50,000) – ($720,000 + $61,00,000)]

= $520,000 – [$94,85,000 - $68,20,000]

= $520,000 - $26,65,000

= -$21,45,000

Cash Flow from assets

Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders

= -$12,10,000 - $21,45,000

= -$33,55,000

Operating Cash Flow

Operating Cash Flow using the Cash Flow from assets Equation

Cash flow from assets = Operating Cash flows – Change in Net Working capital – Net Capital Spending

-$33,55,000 = Operating cash flow – (-$185,000) - $730,000

Operating cash flow = -$33,55,000 - $185,000 + $730,000

Operating cash flow = -$28,10,000

“Therefore, the firm's 2018 operating cash flow, or OCF = (B). -$28,10,000”