Question

The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $2.9 million in long-term debt, $770,000 in the common stock account, and $6 million in the additional paid-in surplus account. The 2009 balance sheet showed $3.5 million, $985,000, and $8.25 million in the same three accounts, respectively. The 2009 income statement showed an interest expense of $230,000. The company paid out $550,000 in cash dividends during 2009. If the firm's net capital spending for 2009 was $780,000, and the firm reduced its net working capital investment by $165,000, the firm's 2009 operating cash flow, or OCF is:_________.
a. $-2,770,000
b. $-1,670,000
c. $-2,285,000
d. $-4,000,000
e. $2,615,000

Answer 1

Answer:

OCF = -$1,670,000

Explanation:

To calculate this, the following are first calculated:

Cash flow to creditors = Interest expense - (Long-term debt in 2009 - Long-term debt in 2008) = $230,000 – (3,500,000 – 2,900,000) = -$370,000

Cash flow to stockholders = Dividends paid – ((Common stock in 2009 + Additional paid-in surplus in 2009) - (Common stock in 2008 + Additional paid-in surplus in 2008)) = $550,000 – (($985,000 + $8,250,000) – ($770,000 + $6,000,000)) = -$1,915,000

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders = -$370,000 - $1,915,000 = $2,285,000

The the firm's 2009 operating cash flow, or OCF can now be calculated as follows:

Cash flow from assets = OCF - Net working capital investment  - Net capital spending

-$2,285,000 = OCF - (-$165,000) - $780,000

-$2,285,000 = OCF + $165,000 - $780,000

OCF = -$2,285,000 - $165,000 + $780,000 = -$1,670,000