You are given the following information about Palmer Golf Shop, Inc. The 2018 balance sheet of Palmer Golf Shop, Inc., showed long-term debt of $2.5 million, and the 2019 balance sheet showed long-term debt of $2.35 million. The 2019 income statement showed an interest expense of $175,000. What was the firm’s cash flow to creditors during 2019? The 2018 balance sheet of Palmer Shop, Inc., showed $725,000 in the common stock account and $3.75 million in the additional paid-in surplus account. The 2019 balance sheet showed $955,000 and $3.6 million in the same two accounts, respectively. If the company paid out $635,000 in cash dividends during 2019, what was the cash flow to stockholders for the year? What is cash flow from assets? Suppose you also know that the firm’s net capital spending for 2019 was $500,000 and that the firm increased its net working capital investment by $65,000. What was the firm’s 2019 operating cash flow, or OCF?

Answer and Explanation:

The computation is shown below:

a. 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]

= $175,000 – [$2,350,000 - $2,500,000

= $175,000 - (-$150,000)

=  $325,000

b. Cash Flow to Stockholders

Cash Flow to Stockholders = Dividend Paid – Net New Equity

= Dividend Paid – [(Ending common stock balance + Additional paid-in surplus account at the end) - (Beginning common stock balance  + Additional paid-in surplus account at the beginning)

= $635,000 – [($955,000 + $3,600,000) – ($725,000 + $3,750,000)]

= $635,000 – [$4,555,000 - $4,475,000]

= $635,000 - $80,000

= $555,000

c.  Cash Flow from assets

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

= $325,000 + $555,000

= $880,000

d.  Operating Cash Flow  

As We know that,

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

$880,000 = Operating cash flow - ($65,000) - $500,000

So,

Operating cash flow = $880,000 + $65,000 + $500,000

= $1,445,000

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