The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.15 million in lo
ID: 2810835 • Letter: T
Question
The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.15 million in long-term debt, $700,000 in the common stock account, and $6.3 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.75 million, $975,000, and $8.45 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $280,000. The company paid out $690,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $760,000, and the firm reduced its net working capital investment by $145,000, what was the firm's 2018 operating cash flow, or OCF?
Explanation / Answer
Cash flow from assets(CFFA) = OCF - NCS - change in NWC
Step 1: Calculation of CFFA
CFFA = CF to creditors + CF to shareholders
CF to creditors = Interest paid - Net new borrowing
Net new borrowing = ending long term debt - beginning long term debt
CF to creditors = 2,80,000 - 16,00,000
CF to creditors = - 13,20,000
CF to shareholders = Dividends paid - Net new equity raised
Net new equity raised = [ending(2018) common stock + APIC] - [beginning(2017) common stock + APIC]
Net new equity raised = 975000 + 84,50,000,-,7,00,000,-,63,00,000,=24,25,000
CF to shareholders = 6,90,000 - 2425000 = - 17,35,000
Cash flow from assets(CFFA) = -13,20,000 + (-17,35,000) = - 30,55,000
CFFA = OCF - Net capital spending - change in Net working capital
-30,55,000 = OCF - 760,000 - (-1,45,000)
-30,55,000 = OCF - 6,15,000
OCF = -$ 24,40,000
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