The December 31, 2009, balance sheet of Schism, Inc., showed long-term debt of $

Question

The December 31, 2009, balance sheet of Schism, Inc., showed long-term debt of $1.415 million, $143,000 in the common stock account and $2.68 million in the additional paid-in surplus account. The December 31, 2010, balance sheet showed long-term debt of $1.61 million, $153,000 in the common stock account and $2.98 million in the additional paid-in surplus account. The 2010 income statement showed an interest expense of $95,500 and the company paid out $148,000 in cash dividends during 2010. The firm’s net capital spending for 2010 was $990,000, and the firm reduced its net working capital investment by $128,000.

Required:

What was the firm’s operating cash flow during 2010?

Explanation / Answer

Cash flow to creditors = Interest paid – Net new borrowing Cash flow to creditors = Interest paid – (LTDend – LTDbeg) Cash flow to creditors = $95,500 – ($1,610,000 – 1,415,000) Cash flow to creditors = –$99,500 The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash flow to stockholders is: (Note that APIS is the additional paid-in surplus.) Cash flow to stockholders = Dividends paid – Net new equity Cash flow to stockholders = Dividends paid – (Commonend + APISend) – (Commonbeg + APISbeg) Cash flow to stockholders = $148,000 – [($153,000 + 2,980,000) – ($143,000 + 2,680,000)] Cash flow to stockholders = –$162,000 We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is: Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow from assets = –$99,500 – 162,000 Cash flow from assets = –$261,500 We also know that cash flow from assets is equal to the operating cash flow minus the change in net working capital and the net capital spending. We can use this relationship to find the operating cash flow. Doing so, we find: Cash flow from assets = OCF – Change in NWC – Net capital spending –$261,500 = OCF – (–$128,000) – (990,000) OCF = –$261,500 – 128,000 + 990,000 OCF = $600,500

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