Taxable Income 870 0 Net Income 57420 Income Statement QUESTION 3A

# Taxable income 870 0 net income 57420 income

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Taxable Income …………………………………………………………… 870 Taxes (34%) ………………………………………………………………… (295.80) Net Income ………………………………………………………………… \$574.20 Income Statement: QUESTION 3A
Operating Cash Flow (OCF) is the measure of the amount of cash generated by a firm’s normal business operations. It indicates whether the firm is able to generate positive cash flow to maintain its operation, or whether it may require external financing. OCF = EBIT + Depreciation – (EBIT * Tax Rate) = \$2,700 + \$4,050 – (\$2,700 * 0.34) = \$5,832 QUESTION 3B
Net Capital Spending (NCS) = Ending Net Fixed Assets – Beginning Net Fixed Assets + Depreciation = \$16,800 - \$13,650 + \$4,050 = \$7,200 Net Operating = Current Assets – Current Liabilities Working Capital (NOWC) Beginning NOWC = \$4,800 – \$2,700 = \$2,100 Ending NOWC = \$5,930 – \$3,150 = \$2,780 Changes in NOWC = Ending NOWC – Beginning NOWC = \$2,780 – \$2,100 = \$680 Cash Flow From Assets (CFFA) * = OCF – NCS – Changes in NOWC QUESTION 3C * CFFA here is referred to as CFFA without Interest Tax Shield
Cash Flow From Assets (CFFA) = OCF – NCS – Changes in NOWC = \$5,832 – \$7,200 – \$680 = –\$2,048 A negative CFFA is possible: \$\$ Outflow > \$\$ Inflow The positive or negative sign represent whether the firm raised funds or distributed funds on a net basis. In this case, the firm raised more money in the form of new debt (borrowing) and equity (issuing shares) than it paid out to creditors and stockholders for that year. The firm may be… i) In its early stages ii) Investing heavily to promote growth QUESTION 3C
Cash Flow to Creditors = Interest Paid – Net New Borrowing = \$1,830 – 0 = \$1,830 Cash Flow to Stockholders = Dividends Paid – Net New Equity Raised CFFA* + Interest Tax Shield = Cash Flow to + Cash Flow to Stockholders Creditors Interest Tax Shield = \$1,830 * 0.34 = \$622.20 QUESTION 3D * CFFA here is referred to as CFFA without Interest Tax Shield, therefore it must be added to CFFA to get cash flows to stockholders and creditors
CFFA + Interest Tax Shield = Cash Flow to + Cash Flow to Stockholders Creditors Cash Flow to = CFFA + Interest Tax Shield – Cash Flow to Creditors Stockholders = –\$2,048 + \$622.20 –\$1,830 = –\$3,255.80 QUESTION 3D Cash Flow to Stockholders = Dividends Paid – Net New Equity Raised Net New Equity Raised = Dividends Paid – Cash Flow to Stockholders = \$1,300 – (-\$3,255.80) = \$4,555.80
# Account Title Outcome 3A Net Income + 3B OCF + 3C CFFA 3D CF to Creditors + CF to Stockholders QUESTION 3D
# Account Title Outcome 3A Net Income + Interpretation of positive sign: The firm profited from sales in the year. QUESTION 3D
# Account Title Outcome 3B OCF + Interpretation of positive sign: The firm has generated sufficient cash flow from sales and operating activities. QUESTION 3D
# Account Title Outcome 3C CFFA Interpretation of negative sign: The firm’s cash outflow exceeded inflow. However, if this net outflow is largely due to a relatively high investment of fixed asset, then it is more justifiable that the firm is financially healthy.

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• Spring '11
• tohmunheng
• Depreciation, Bsp, Financial Ratio, Generally Accepted Accounting Principles