The 2008 balance sheet of Maria\'s Tennis Shop, Inc., showed $2.9 million in lon
ID: 2812772 • Letter: T
Question
The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $2.9 million in long-term debt, $780,000 in the common stock account, and $6.45 million in the additional paid-in surplus account. The 2009 balance sheet showed $4 million, $955,000, and $8.1 million in the same three accounts, respectively. The 2009 income statement showed an interest expense of $360,000. The company paid out $530,000 in cash dividends during 2009. If the firm's net capital spending for 2009 was $670,000, and the firm reduced its net working capital investment by $125,000, the firm's 2009 operating cash flow, or OCF?
Multiple Choice, which one
$-1,490,000
$-3,640,000
$2,285,000
$-2,550,000
$-2,035,000
The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $2.9 million in long-term debt, $780,000 in the common stock account, and $6.45 million in the additional paid-in surplus account. The 2009 balance sheet showed $4 million, $955,000, and $8.1 million in the same three accounts, respectively. The 2009 income statement showed an interest expense of $360,000. The company paid out $530,000 in cash dividends during 2009. If the firm's net capital spending for 2009 was $670,000, and the firm reduced its net working capital investment by $125,000, the firm's 2009 operating cash flow, or OCF?
Explanation / Answer
Answer - We can calculate Operating Cash Flow (OCF) with the help of following equation -
Cash flow from financing activities (CFFA) = OCF- Net capital Spending (NCF) - change in net working capital
CFFA = Cash flow to creditors + Cash flow to share holders
Cash flow to creditors = Interest paid - Net new borrowing
Interest paid = $360,000
Net new borrowing = long-term debt in 2009 - long-term debt in 2008
= $4,000,000 - $2,900,000 = $1,100,000
Cash flow to creditors = $360,000 - $1,100,000 = $-740,000
Cash flow to share holders = Dividend paid - Net new equity issued
Dividend paid = $530,000
Net new equity issued = (equity + retained earnings in 2009) - (equity + retained earnings in 2008)
=($955,000 + $8,100,000) - ($780,000 + $6,450,000)
= $1,825,000
Cash flow to share holders = $530,000 - $1,825,000 = $-1,295,000
CFFA = $-740,000 - $-1,295,000 = $-2,035,000
Now if we put values in the following equation -
Cash flow from financing activities (CFFA) = OCF- Net capital Spending (NCF) - Change in net working capital (NWC)
$-2,035,000 = OCF - $670,000 - ($-125,000)
$-2,035,000 = OCF - $545,000
OCF = $-2,035,000 + $545,000 = $-1,490,000
So, Operating Cash Flow = $-1,490,000
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