Question

The December 31, 2015, balance sheet of Schism, Inc., showed long-term debt of $1,385,000, $137,000 in the common stock account, and $2,620,000 in the additional paid-in surplus account. The December 31, 2016, balance sheet showed long-term debt of $1,550,000, $147,000 in the common stock account, and $2,920,000 in the additional paid-in surplus account. The 2016 income statement showed an interest expense of $92,500 and the company paid out $142,000 in cash dividends during 2016. The firm’s net capital spending for 2016 was $930,000, and the firm reduced its net working capital investment by $122,000. What was the firm's 2016 operating cash flow, or OCF?

Answer 1

Cash Flow to Creditors

Cash Flow to Creditors = Interest Expenses Paid – Net Increase in Long term debt

= Interest Expenses Paid – [Long term debt at the end – Long term Debt at the Beginning]

= $92,500 – [$1,550,000 - $1,385,000]

= $92,500 - $165,000

= -$72,500

Cash Flow to Stockholders

Cash Flow to Stockholders = Dividend Paid – Net New Equity

= Dividend Paid – [(Common stock at the end + Additional paid-in surplus account at the end) - (Common stock at the beginning + Additional paid-in surplus account at the beginning)

= $142,000 – [($147,000 + $2,920,000) – ($137,000 + $2,620,000)]

= $142,000 – [$3,067,000 - $2,757,000]

= $142,000 - $10,000

= -$168,000

Cash Flow from assets

Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders

= -$72,500 - $168,000

= -$240,500

Operating Cash Flow  

Operating Cash Flow using the Cash Flow from assets Equation

We know, Cash flow from assets = Operating Cash flows – Change in Net Working capital – Net Capital Spending

-$240,500 = Operating cash flow - (-$122,000) - $930,000

Operating cash flow = -$240,500 + $122,000 - $930,000

Operating cash flow = $567,500

“Therefore, the firm’s 2016 operating cash flow or OCF will be $567,500”