Question

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.7 million in long-term debt, $760,000 in the common stock account, and $6.25 million in the additional paid-in surplus account. The 2018 balance sheet showed $4.25 million, $905,000, and $7.9 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $180,000. The company paid out $510,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $850,000, and the firm reduced its net working capital investment by $195,000, what was the firm's 2018 operating cash flow, or OCF?

Answer 1

Answer: -($2,000,000)

Explanation:

Cash flow to creditors = Increase in long term debt + Interest Paid

                                     = ($2.7 - $4.25) + $180,000

                                     = - $1,550,000 + $180,000

                                     = - ($1,370,000)

Cash flow to shareholders = Dividends paid + Increase in common stock + Increase in additional paid-in surplus account

                                            = $510,000 + ($760,000 - $905,000) + ($6.25 - $7.9)

                                            = $510,000 - $145,000 - $1,650,000

                                            = - ($1,285,000)

Cash flow from Assets = Cash flow to creditors + Cash flow to shareholders

                                      = - ($1,370,000)  - ($1,285,000)

                                      = - ($2,655,000)

Operating cash flow =  Cash flow from Assets + Change in net working capital + net capital spending

                                  =   - ($2,655,000) + (-$195,000) + $850,000

                                  = -($2,000,000)