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14. Calculating Total Cash Flows.
Greene Co. shows the following information on its 2008 income statement:
Sales = $138, Costs = $71, Other expenses = $4, Depreciation expense = $10, Interest expense = $7, Taxes = $17, Dividends = $5,400.
In addition, you're told that the firm issued $2,500 in new equity during 2008, and redeemed $3,800 in outstanding long-term debt.
a. What is the 2008 operating cash flow?
b. What is the 2008 cash flow to creditors?
c. What is the 2008 cash flow to stockholders?
d. If net fixed assets increased by $17,400 during the year, what was the addition to NWC?
a. To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:
Income Statement Sales $138, Costs 71, Other Expenses 4, Depreciation 10, EBIT $52, 300 Interest 7, Taxable income $44, 400 Taxes 17, Net income $26,64 0
Dividends $5, Addition to retained earnings 21 , 240
Dividends paid plus addition to retained earnings must equal net income, so:
Net income = Dividends + Addition to retained earnings
Addition to retained earnings = $26,640 – 5,
Addition to retained earnings = $21,
So, the operating cash flow is:
OCF = EBIT + Depreciation – Taxes
OCF = $52,300 + 10,100 – 17,
OCF = $44,
b. The cash flow to creditors is the interest paid, plus any new borrowing. Since the company redeemed long-term debt, the new borrowing is negative. So, the cash flow to creditors is:
Cash flow to creditors = Interest paid – Net new borrowing
Cash flow to creditors = $7,900 – (–$3,800)
Cash flow to creditors = $11,
c. The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow to stockholders is:
Cash flow to stockholders = Dividends paid – Net new equity
Cash flow to stockholders = $5,400 – 2,
Cash flow to stockholders = $2,
d. In this case, to find the addition to NWC, we need to find the cash flow from assets. We can then use the cash flow from assets equation to find the change in NWC. We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is:
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = $11,700 + 2,
Cash flow from assets = $14,
Net capital spending is equal to depreciation plus the increase in fixed assets, so:
Net capital spending = Depreciation + Increase in fixed assets
Net capital spending = $10,100 + 17,
Net capital spending = $27,
Now we can use the cash flow from assets equation to find the change in NWC. Doing so, we find:
Cash flow from assets = OCF – Change in NWC – Net capital spending
$14,600 = $44,640 – Change in NWC – $27,
Change in NWC = $2,
The operating cash flow for the year was:
OCF = EBIT + Depreciation – Taxes
OCF = $2,420 + 2,420 – 756 = $4,
To calculate the cash flow from assets, we also need the change in net working capital and net capital spending. The change in net working capital was:
Change in NWC = NWCend – NWCbeg
Change in NWC = (CAend – CLend) – (CAbeg – CLbeg)
Change in NWC = ($4,690 – 2,720) – ($3,020 – 2,260)
Change in NWC = $1,
And the net capital spending was:
Net capital spending = NFAend – NFAbeg + Depreciation
Net capital spending = $12,700 – 12,100 + 2,
Net capital spending = $3,
So, the cash flow from assets was:
Cash flow from assets = OCF – Change in NWC – Net capital spending
Cash flow from assets = $4,084 – 1,210 – 3,
Cash flow from assets = – $
The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $146 in funds from its stockholders and creditors to make these investments.
The cash flow from creditors was:
Cash flow to creditors = Interest – Net new LTD
Cash flow to creditors = $260 – 0
Cash flow to creditors = $
Rearranging the cash flow from assets equation, we can calculate the cash flow to stockholders as:
Cash flow from assets = Cash flow to stockholders + Cash flow to creditors
- $146 = Cash flow to stockholders + $
Cash flow to stockholders = – $
23. Cash Flow Identity.
Find Your Way Back, Inc., reported the following financial statements for the last two years. Construct the cash flow identity for the company.
- Sales 706, 2008 Income Statement
- Cost of goods sold 342,
- Selling & administrative 155,
- Depreciation 68,
- EBIT 139,
- Interest 24,
- EBT 115,
- Taxes 40,
- Net income 75,
- Dividends 12,
- Addition to retained earnings 63,
- Balance Sheet as of December 31, FIND YOUR WAY BACK, INC.
- Cash 16,650 Accounts payable 11,
- Accounts receivable 23,742 Notes payable 18,
- Inventory 17,242 Current liabilities 30,
- Current assets 57, - Long-term debt 171,
- Net fixed assets 430,533 Owners’ equity 287,
- Total assets 488,167 Total liabilities and owners' equity 488,
- Balance Sheet as of December 31, FIND YOUR WAY BACK, INC.
- Cash 17,883 Accounts payable 13,
- Accounts receivable 26,374 Notes payable 20,
- Inventory 28,443 Current liabilities 33,
- Current assets 72, - Long-term debt 190,
- Net fixed assets 507,888 Owners’ equity 356,
- Total assets 580,588 Total liabilities and owners' equity 580,
New equity = Ending equity – Beginning equity – Addition to retained earnings New equity = $356,865 – 287,152 – 63, New equity = $6,
What happened was the equity account increased by $69,713. $63,214 of this came from addition to retained earnings, so the remainder must have been the sale of new equity. Now we can calculate the cash flow to stockholders as:
Cash flow to stockholders = Dividends paid – Net new equity Cash flow to stockholders = $12,000 – 6, Cash flow to stockholders = $5,
The company paid $5,120 to creditors and $5,501 to stockholders.
Finally, the cash flow identity is:
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders $10,621 = $5,120 + $5,
The cash flow identity balances, which is what we expect.
