Question

The December 31, 2018, balance sheet of Whelan, Inc., showed long-term debt of $1,420,000, $144,000 in the common stock account, and $2,690,000 in the additional paid-in surplus account. The December 31, 2019, balance sheet showed long-term debt of $1,620,000, $154,000 in the common stock account and $2,990,000 in the additional paid-in surplus account. The 2019 income statement showed an interest expense of $96,000 and the company paid out $149,000 in cash dividends during 2019. The firm’s net capital spending for 2019 was $1,000,000, and the firm reduced its net working capital investment by $129,000.

What was the firm's 2019 operating cash flow, or OCF? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1

Compute the cash flow to creditors (CFC), using the equation as shown below:

CFC = Interest expenses – (Long term debts for 2019 – Long term debts for 2018)

        = $96,000 – ($1,620,000 - $1,420,000)

        = $96,000 - $200,000

        = ($104,000)

Hence, the CFC is ($104,000).

Compute the cash flow to stockholders (CFS), using the equation as shown below:

CFS = Dividends – (Common stock for 2019 + Additional capital for 2019 - Common stock for 2018 - Additional capital for 2018)

        = $149,000 – ($154,000 + $2,990,000 - $144,000 - $2,690,000)

        = $149,000 - $310,000

        = ($161,000)

Hence, the CFS is ($161,000)

Compute the operating cash flows, using the equation as shown below:

Operating cash flows = CFC + CFS + Net capital spending – Decrease in working capital

                                   = (104,000) + ($161,000) + 1,000,000 - $129,000

                                   = $606,000

Hence, the operating cash flows (OCFs) are $606,000.