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The 2011 balance sheet of Anna's Tennis Shop, Inc., showed long-term debt of $1.45 million, and...

Question:

The 2011 balance sheet of Anna's Tennis Shop, Inc., showed long-term debt of $1.45 million, and the 2012 balance sheet showed long-term debt of $1.52 million. The 2012 income statement showed an interest expense of $127,000. The 2011 balance sheet of Anna's Tennis Shop, Inc., showed $490,000 in the common stock account and $3.4 million in the additional paid-in surplus account. The 2012 balance sheet showed $525,000 and $3.7 million in the same two accounts, respectively. The company paid out $275,000 in cash dividends during 2012. Suppose you also know that the firm?s net capital spending for 2012 was $945,000, and that the firm reduced its net working capital investment by $87,000.

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.)

Cash Flow from Assets:

The cash flow from assets represents the operating cash flow after being adjusted for the net capital spending and the changes in working capital. It is also equal to the sum of the cash flow to creditors and the cash flow to stockholders. The cash flow to creditors represents the difference between the interest expense and net new debt while the cash flow to stockholders represents the difference between the dividends paid and net new equity.

Answer and Explanation:


Answer:

Anna's operating cash flow for 2012 was $855,000.

Explanation:

The first step is to determine the cash flow to creditors:

Computation:

  • Cash flow to creditors = Interest expense - (Ending balance in long-term debt - Beginning balance in long-term debt)
  • Cash flow to creditors = $127,000 - ($1,520,000 - $1,450,000)
  • Cash flow to creditors = $57,000

The second step is to determine the cash flow to common stock:

Computation:

  • Cash flows to Common stock = Dividends - (Ending Common Stock + Ending Paid-in Surplus) - (Beginning Common Stock + Beginning Paid-in Surplus)
  • Cash flows to Common stock = $275,000 - ($525,000 + $3,700,000) - ($490,000 + $3,400,000)
  • Cash flows to Common stock = -$60,000

The third step is to determine the cash flow from assets:

Computation:

  • Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
  • Cash flow from assets = $57,000 - $60,000
  • Cash flow from assets = -$3,000

The fourth step is to determine the operating cash flow:

Computation:

  • Cash flow from assets = Operating cash flow - Net capital spending + Decrease in working capital
  • Operating cash flow = -$3,000 + $945,000 - $87,000
  • Operating cash flow = $855,000

Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
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