The 2011 balance sheet of Anna?s Tennis Shop, Inc., showed long-term debt of $6.
ID: 2644937 • Letter: T
Question
The 2011 balance sheet of Anna?s Tennis Shop, Inc., showed long-term debt of $6.4 million, and the 2012 balance sheet showed long-term debt of $6.65 million. The 2012 income statement showed an interest expense of $225,000. The 2011 balance sheet of Anna?s Tennis Shop, Inc., showed $630,000 in the common stock account and $4.9 million in the additional paid-in surplus account. The 2012 balance sheet showed $670,000 and $5.4 million in the same two accounts, respectively. The company paid out $620,000 in cash dividends during 2012. Suppose you also know that the firm?s net capital spending for 2012 was $1,490,000, and that the firm reduced its net working capital investment by $93,000. What was the firm?s 2012 operating cash flow, or OCF? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)Explanation / Answer
Given, For 2011- Long term D1= $ 6,400,000
Common equity E1= $ 630,000
Surplus S1= $ 4,900,000 and let assets be A1, Current assets be CA1 and Current Liabilities be CL1
For 2012- Long term D2= $ 6,650,000
Common equity E2= $ 670,000
Surplus S2= $ 5,400,000 and let, Depreciation be D2, Assets be A2, Current assets be CA2 and Current Liabilities be CL2
Now, For 2011, D1 + CL1 = E1 + S1 + A1 + CA1
Therefore, A1 + CA1 - CL1 = $ 870,000-------------------------------------------------------------(I)
Now, For 2012, D2 + CL2 = E2 + S2 + A2 + CA2
Therefore, A2 + CA2 - CL2 = $ 580,000-------------------------------------------------------------(II)
Now, (I) - (II) => A1 - A2 + (CA1 - CL1) - (CA2 - CL2) = $ 290,000------------------------(III)
Also, (CA1 - CL1?) - (CA2 - CL2) = $ 93,000 (since drop in net working capital)
Therefore, (III) => A1 - A2 = $ 197,000--------------------------------------------------------------(IV)
Also, Net capital spending = A2- A1+ D2
Therefore, $ 1,490,000 = $ 197,000 + D2 (from (IV))
Therefore, D2 = $ 1,687,000
Now, OCF = EBIT + Depreciation - Taxes
Therefore OCF = Change in surplus + Interest expense + Cash dividend + Depreciation - Taxes
Therefore OCF = ($ 5,400,000 - $ 4,900,000) + $ 225,000 + $ 620,000 + $ 1,687,000 - $ 0
Therefore OCF = $ 3,032,000
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