The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed long-term debt of $6.
ID: 2656679 • Letter: T
Question
The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed long-term debt of $6.1 million, and the 2015 balance sheet showed long-term debt of $6.35 million. The 2015 income statement showed an interest expense of $210,000. The 2014 balance sheet showed $600,000 in the common stock account and $5.7 million in the additional paid-in surplus account. The 2015 balance sheet showed $640,000 and $6.2 million in the same two accounts, respectively. The company paid out $605,000 in cash dividends during 2015. Suppose you also know that the firm’s net capital spending for 2015 was $1,460,000, and that the firm reduced its net working capital investment by $87,000. What was the firm’s 2015 operating cash flow, or OCF?
Explanation / Answer
Cash flow to creditors = Interest paid – Net new borrowing
Cash flow to creditors = $210,000 – (LTD ending – LTD beginning)
Cash flow to creditors = $210,000 – ($6,350,000 – 6,100,000)
Cash flow to creditors = $210,000 – 250,000
Cash flow to creditors = –$45,000
Cash flow to stockholders = Dividends paid – Net new equity
Cash flow to stockholders = $605,000 – [(Common end + APIS end) – (Common beg + APIS beg)]
Cash flow to stockholders = $605,000 – [($640,000 + 6,200,000) – ($600,000 + 5,700,000)]
Cash flow to stockholders = $605,000 – ($6,840,000 – 6,300,000)
Cash flow to stockholders = $65,000
Note, APIS is the additional paid-in surplus.
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = –$45,000 + 65,000
Cash flow from assets = $20,000
Cash flow from assets = OCF – Change in NWC – Net capital spending
$20,000 = OCF – (–$87,000) – 1,460,000
Operating cash flow = $20,000 – 87,000 + 1,460,000
Operating cash flow = $1,393,000
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