Question

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.85 million in long-term debt, $750,000 in the common stock account, and $6.05 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.6 million, $945,000, and $8.5 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $230,000. The company paid out $590,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $750,000, and the firm reduced its net working capital investment by $175,000, what was the firm's 2018 operating cash flow, or OCF?

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]

= $230,000 – [$3,600,000 - $2,850,000]

= $230,000 - $750,000

= -$520,000

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)

= $590,000 – [($945,000 + $85,00,000) – ($750,000 + $60,50,000)]

= $590,000 – [$94,45,000 - $68,00,000]

= $590,000 - $26,45,000

= -$20,55,000

Cash Flow from assets

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

= -$520,000 - $20,55,000

= -$25,75,000

Operating Cash Flow  

Operating Cash Flow using the Cash Flow from assets Equation

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

-$25,75,000 = Operating cash flow – (-$175,000) - $750,000

Operating cash flow = -$25,75,000 - $175,000 + $750,000

Operating cash flow = -$20,00,000 (Negative)

“Therefore, the firm's 2018 operating cash flow, or OCF would be -$20,00,000”