Cash Flow Statements Study Guide

North South University
EMB 660: Corporate Finance

Cash Flow Statements Study Guide
Problem 11-45 Statement of Cash Flows (Indirect Method)

Arctic Company’s income statement and comparative balance sheets follow.
ARCTIC COMPANY
Income Statement
For the Year Ended December 31, 2019
Sales $ 728,000
Cost of goods sold $ 534,000
Wages expense 190,000
Advertising expense 31,000
Depreciation expense 22,000
Interest expense 18,000
Gain on sale of land (25,000) 770,000
Net loss $ (42,000)
ARCTIC COMPANY
Balance Sheet
Dec. 31, 2019 Dec. 31, 2018
Assets
Cash $ 49,000 $ 28,000
Accounts receivable 42,000 50,000
Inventory 107,000 113,000
Prepaid advertising 10,000 13,000
PPE 360,000 222,000
Accumulated depreciation (78,000) (56,000)
Total assets $ 490,000 $ 370,000
Liabilities and Stockholders’ Equity

Accounts payable $ 17,000 $ 31,000
Interest payable 6,000 –
Bonds payable 200,000 –
Common stock 245,000 245,000
Retained earnings 52,000 94,000
Treasury stock (30,000) –
$ 490,000 $ 370,000
During 2019, Arctic sold land for $17,000 cash that originally cost $45,000. Arctic also purchased
equipment for cash, acquired treasury stock for cash, and issued bonds payable for cash in 2019. Accounts
payable relate to merchandise purchases.
Page | 1
Suggested solutions:
Upon analyzing the information, we can gather the following significant points:
1. The company sold land for $70,000 cash that originally cost the company $45,000. So, there was
a gain of $25,000 on this land sale. This is a non-operating gain and hence will be subtracted from
net income in calculating OCF under the accounting cash flow statement. In the financial cash flow
statement, it will not affect OCF calculation as OCF’s baseline is EBIT, not net income. However,
the full selling price of $70,000 will be considered an inflow in calculating ICF.
2. Purchase of new equipment can be calculated using either the gross PPEs or net.
Using gross PPE, new equipment purchases = new gross PPE – old gross PPE + gross value of the
item sold.
New equipment purchase:
Gross PPE of 2019: $360,000

Gross PPE of 2018: 222,000
Change: $138000
Plus gross value of item sold: 45,000
New equipment purchase: $183,000
Using the net method:
New equipment purchase = Net PPE this year – Net PPE last year + Depreciation + Book value of
item(s) sold (if any)
= $282,000 – $166, 000 + $22,000 + $45,000

= $183,000
Net ICF will be:
Purchase of new PPE $183,000

Less: Cash proceeds from sale of land 70,000
Net ICF $113,000
3. New bonds issued for cash, $200,000. This amount will be reported in the FCF section.
4. Analysis of PPE:
Historical Cost at the end of 2018: $222,000

Less: HC of land sold 45,000
Balance after sale $177,000
Add: Equipment acquired during 2019 183,000
Page | 2
Balance at the end of 2019 $360,000
5. Cash paid for interest:

Interest expense as reported in the income statement $18,000
Subtract: Increase in interest payable 6,000
Cash interest paid $12,000
An increase interest payable by $6,000 means the company did not pay the full amount of its
current year’s interest expense of $18,000. It paid only $12,000 and the remaining $6,000 is still
payable on balance date. So the total cash used to pay interest was $18,000 – $6,000 = $12,000.
ARCTIC COMPANY
Cash Flow Statements
Financial Cash Flow Accounting Cash Flow

Step 1: Calculate net investment in net working
capital (NINWC)
2019 2018
Current Assets: Current Assets:
Cash $49 Cash $28
Accounts receivable 42 Accounts receivable 50
Inventory 107 Inventory 113
Prepaid advertising 10 Prepaid advertising 13
Total current assets 208 Total current assets 204
Current Liabilities: Current Liabilities:

Accounts payable $17 Accounts payable $31
Total current liabilities $17 Total current liabilities $31
Working Capital: $ 191 Working Capital: $ 173
Working capital2019 – Working Capital2018
= $191 – $173 = $18
Step 2: Calculate OCF: Step 2: Calculate OCF:
Let’s first recast the income statement to identify OCF = Net income……………………..$ (42)
EBIT + Depreciation……………………………..22
ARCTIC COMPANY – Gain on sale of land……..…………..25
Income Statement + Decrease in accounts receivable…8
For the year ended December 31, 2019 + Decrease in inventories……………...6
+ Decrease in prepaid advertising…3
Sales $ 728,000 – Decrease in accounts payable…..14
Cost of goods sold 534,000 + Increase in interest payable……... 6
Gross profit 194,000 = OCF……………………………………...$(36)
Operating expenses
Wages expense 190,000
Advertising expense 31,000
Page | 3
Total operating expenses 243,000
Operating profit or EBIT (49,000)
Other revenues and
expenses
Interest expense (18,000)
Other gains and losses
Gain on sale of land 25,000
Other revenues, expenses, 7,000
losses and gains
Net income (loss) $ (42,000)
OCF = EBIT + Depreciation + Amortization –

Current Taxes
= $(49) + $22 – $0
= $(27)
Step 3: Calculate ICF or Capital Expenditure Step 3: Calculate ICF or Capital Expenditure
ICF = Δ Net PPE + Depreciation + Δ Intangible ICF = Δ Net PPE + Depreciation + Δ Intangible
Assets + Amortization + Book value of PPE sold – Assets + Amortization + Book value of PPE sold –
Cash proceeds from sale of PPE Cash proceeds from sale of PPE
= ($282 – $166) + depreciation of $22 + n/a + n/a = ($282 – $166) + depreciation of $22 + n/a + n/a
+ $45 – $70 + $45 – $70
= $116 + $22 + $45 – $70 = $116 + $22 + $45 – $70
= $183 – $70 = $183 – $70
= $113 = $113
Cash purchase of PPE: $ 183 Cash purchase of PPE: $ 183

Cash sale of PPE 70 Cash sale of PPE 70
Net ICF $113 [Note: this is a cash Net ICF $113 [Note: this is a cash
outflow] outflow]
Step 4: Calculate FCF Step 4: Calculate FCF
Cash Flow from transactions with debtholders: Cash Flow from transactions with debtholders:
= Cash interest paid+ Cash used in debt = Debt retirement – Proceeds from long-term
retirement – Proceeds from long-term debt sales debt sales
= ($0 – $200)
= $12 – $200 = – $200 [Note: this is a cash inflow]
= – $188 [Note: this is an inflow]
Cash Flow from transactions with stockholders: Cash Flow from transactions with stockholders:
= Dividend paid – New issue raised = Dividend paid – New issue raised
= Dividend paid – (Stock sold – Stock = Dividend paid – (Stock sold – Stock
repurchased) repurchased)
= $0 – ($0 – $30) = $0 – ($0 – $30)
= $30 [Note: this is an outflow] = $30 [Note: this is an outflow]
Page | 4
Proof: Proof:
OCF – ICF – NINWC = CF (Debtholders) + CF OCF + ICF + FCF = Δ Cash and cash equivalents
(Stockholders)
– $36 – $113 + $200 – $30 = $49 – $28
Or, CF (A) = CF (B) + CF (S) Or, $21 = $21 
Or, – $25 – $113 – $18 = – $188 + $30 The financial cash flow statement treats financing
Or, – $138 = – $138  outflows as positives and inflows as negatives,
whereas the accounting cash flow statement
considers outflows as negatives and inflows as
positives.
Page | 5
Problem 11-46 Statement of Cash Flows (Indirect Method)
Dair Company’s income statement and comparative balance sheets follow.
DAIR Company
Income Statement
For the Year Ended December 31, 2019
Sales $ 700,000
Cost of goods sold $ 440,000
Wages and operating expenses 95,000
Amortization expense 7,000
Income tax expense 36,000
Loss on bond retirement 5,000 615,000
Net income $ 85,000
Dair Company
Balance Sheet
Dec. 31, 2019 Dec. 31, 2018
Assets
Cash $ 27,000 $ 18,000
Inventory 103,000 109,000
Prepaid expenses 12,000 10,000
PPE 360,000 336,000
Accumulated depreciation (87,000) (84,000)
Intangible assets 43,000 50,000
Total assets $ 511,000 $ 487,000
Liabilities and Stockholders’ Equity

Accounts payable $ 32,000 $ 26,000
Interest payable 4,000 7,000
Income tax payable 6,000 8,000
Bonds payable 60,000 120,000
Common stock 252,000 228,000
Retained earnings 157,000 98,000
$ 511,000 $ 487,000
During 2019, the company sold for $17,000 cash old equipment that had cost $36,000 and had $19,000
accumulated depreciation. Also in 2019, new equipment worth $60,000 was acquired in exchange for
$60,000 of bonds payable, and bonds payable of $120,000 were retired for cash at a loss. A $26,000 cash
dividend was declared and paid in 2019. Any stock issuances were for cash.
Page | 6
Suggested solutions:
Upon analyzing the information, we can gather the following significant points:
6. An item of old equipment has been sold for $17,000 cash during the year. So, this will be an inflow
in the ICF section.
7. The item that has been sold had a book value of $17,000, calculated as follows:
Historical cost: $36,000

Less: Accumulated depreciation 19,000
Book value on the date of sale $17,000
Sale proceeds $17,000
Gain or loss on sale $0
When an item is sold at its book value, there is no gain or loss on the sale of the item. Hence, no
gain or loss on sale of this old equipment has been reported in the company’s income statement.
8. New equipment worth $60,000 was acquired during the year but the acquisition was financed by
the issue of bonds for the same amount of money. So, it was a non-cash transaction and hence
will not be reported in the cash flow statement.
9. Bonds payable with a face value of $120,000 were retired for cash at a loss. The loss can be found
in the income statement. See the last item on the income statement, “Loss on bond retirement
$5,000”. So, the actual cash used to retire the bonds was $120,000 + $5,000 = $125,000. This
amount will be reported in the FCF section.
10. This loss has two implications in our cash flow statement: One, it will be added to net income as
a non-operating loss to arrive at OCF (Accounting Cash Flow Statement but not in the Financial
Cash Flow Statement) and two, it reduces the amount of cash used to retire the bonds in the FCF
section (see, 4 above).
11. Analysis of PPE:
Historical Cost at the end of 2018: $336,000

Less: HC of old equipment sold 36,000
Balance after sale $300,000
Add: Equipment acquired during 2019 (in exchange for bonds) 60,000
HC at the end of 2019 $360,000
12. Analysis of intangible assets:

Balance at the end of 2018: $50,000
Less: Amortization during 2019 7,000
Balance at the end of 2019 $43,000
13. Cash paid for interest:

Interest expense as reported in the income statement $10,000
Page | 7
Add: Decrease in interest payable 3,000
Cash interest paid $13,000
A decrease interest payable by $3,000 means the company paid not only the current year’s
interest expense of $10,000 but also $3,000 of interest that were due from prior period(s). So the
total cash used to pay interest was $10,000 + $3,000 = $13,000.
14. The same is true for cash paid for income taxes. Income tax expense reported on the income
statement is $36,000. In addition, there is a reduction of $2,000 in income tax payable on the
balance sheet. That means the company has actually paid $38,000 in taxes during the year,
$36,000 for the current year and $2,000 against prior period taxes that were due but unpaid so
far.
15. Common stock balance has gone up from $228,000 to $252,000. This means new stock has been
issued and was issued for cash as has been advised. So, cash received from issue of common stock
of $24,000 will be reported in the FCF (Stockholders) section.
DAIR COMPANY
Cash Flow Statements

capital (NINWC)
2019 2018
Current Assets: Current Assets:
Cash $27 Cash $18
Accounts receivable 53 Accounts receivable 48
Inventory 103 Inventory 109
Prepaid expenses 12 Prepaid expenses 10
Total current assets 195 Total current assets 185
Current Liabilities: Current Liabilities:

Accounts payable $32 Accounts payable $26
Total current liabilities $32 Total current liabilities $26
Working Capital: $ 163 Working Capital: $ 159
= $163 – $159 = $4
Page | 8
Let’s first recast the income statement to identify OCF = Net income……………………..$ 85
EBIT + Depreciation……………………………..22
DAIR COMPANY + Amortization…………………………….…7
Income Statement + Loss on bond retirement………….…5
For the year ended December 31, 2019 – Increase in accounts receivable….5
+ Decrease in inventories……………..6
Sales $ 700,000 – Increase in prepaid expenses…..…2
Cost of goods sold 440,000 + Increase in accounts payable…..…6
Gross profit 260,000 – Decrease in interest payable……..3
Operating expenses – Decrease income taxes payable…2
Wages and operating 95,000 = OCF……………………………………..$119
expenses
Amortization expense 7,000
Operating profit or EBIT 136,000
Other revenues and
expenses
Other gains and losses
Loss on bond retirement 5,000
Taxable income 121,000
Income tax expense 36,000
Net income $ 85,000
OCF = EBIT + Depreciation + Amortization –

Current Taxes
= $136 + $22 + $7 – $38 = $127
Assets + Amortization + Book value of PPE sold – Assets + Amortization + Book value of PPE sold –
Non-cash purchase of PPE – Cash proceeds from Non-cash purchase of PPE – Cash proceeds from
sale of PPE sale of PPE
= ($273 – $252) + $22 + ($43 – $50) + $7 + $17 - = ($273 – $252) + $22 + ($43 – $50) + $7 + $17 -
$60 – $17 $60 – $17
= – $17 = – $17
Cash purchase of PPE: $ 0 Cash purchase of PPE: $ 0

Cash sale of PPE 17 Cash sale of PPE 17
Net ICF ($17) [Note: this is a cash Net ICF ($17) [Note: this is a cash
inflow] inflow]
Page | 9
= Cash interest paid+ Cash used in debt = Debt retirement – Proceeds from long-term
retirement – Proceeds from long-term debt sales debt sales
= ($125 – $0)
= $13 + $125 – $0 = $125 [Note: this is a cash outflow]
= $138
= $26 – ($24 – $0) = $26 – ($24 – $0)
= $26 – $24 = $26 – $24
= $2 = $2 [Note: this is a cash outflow]
Proof: Proof:
(Stockholders)
$119 + $17 + ($125) + ($2) = $27 – $18
Or, CF (A) = CF (B) + CF (S) Or, $9 = $9 
Or, $127 – ($17) – $4 = $138 + $2 The financial cash flow statement treats financing
Or, $140 = $140  outflows as positives and inflows as negatives,
whereas the accounting cash flow statement
considers outflows as negatives and inflows as
positives.
Page | 10
Chapter 2
End-of-chapter questions and answers
Ross, Westerfield, Zaffe, Jordan
Corporate Finance
11th Edition
Prepared by: Waresul Karim
1. Building a Balance Sheet
Sankey, Inc., has current assets of $4,900, net fixed assets of $25,000, current liabilities of $4,100, and
long-term debt of $10,300. What is the value of the shareholders’ equity account for this firm? How
much is net working capital?
Answer
Assets Liabilities and Stockholders’

Equity
Current assets $ 4,900 Current liabilities $ 4,100
Net fixed assets 25,000 Long-term debt 10,300
Total liabilities $14,400
Stockholders’ equity ?
Total assets $ 29,900 $ 29,900
Stockholders’ equity should be total assets or total liabilities and stockholders’ equity minus total
liabilities.
= $29,900 – $14,400
= $15,500
Net working capital = Current assets minus current liabilities

= $4,900 – $4,100
= $800
Page | 11
2. Building an Income Statement
Shelton, Inc., has sales of $435,000, costs of $216,000, depreciation expense of $40,000, interest
expense of $21,000, and a tax rate of 35 percent. What is the net income for the firm? Suppose the
company paid out $30,000 in cash dividends. What is the addition to retained earnings?
Shelton, Inc.
Income Statement
Sales $ 435,000
Costs 216,000
Taxes @ 35% 55,300
Net income $ 102,700
Dividend $ 30,000
Addition to retained earnings $ 72,700
3. Market Values and Book Values
Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $9.5 million. The machinery
can be sold to the Romulans today for $6.5 million. Klingon’s current balance sheet shows net fixed assets
of $5.2 million, current liabilities of $2.4 million, and net working capital of $800,000. If all the current
assets were liquidated today, the company would receive $2.6 million cash.
What is the book value of Klingon’s assets today? What is the market value?
Balance Sheet
Book Value Market Value
Current liabilities 2,400,000 Current assets $ 3,200,000 $ 2,600,000
Investments
Net fixed assets or net PPE 5,200,000 6,500,000
Intangible assets
Total assets $ 8,400,000 $ 9,100,000
Net working capital of $800,000 means current assets are greater than current liabilities by $800,000.
Therefore, if current liabilities total $2,400,000, current assets would be $2,400,000 + $800,000 =
$3,200,000.
Answer
Book value: $8,400,000 and

Market value: $9,100,000
Page | 12
5. Calculating OCF
Barrett, Inc., has sales of $19,800, costs of $10,900, depreciation expense of $2,100, and interest expense
of $1,250. If the tax rate is 40 percent, what is the operating cash flow, or OCF?
Answer
Sales……………….. $19,800
Cost of Goods Sold…… 10,900
Gross Profit….. 8,900
Depreciation Expense 2,100
Operating Profit or EBIT 6,800
Interest Expense 1,250
Taxable Income 5,550
Tax @ 40% 2,220
Net Income 3,330
OCF = EBIT – current taxes + depreciation

= $6,800 – $2,220 + $2,100
= $6,680
6. Calculating Net Capital Spending
Gordon Driving School’s 2014 balance sheet showed net fixed assets of $1.32 million, and the 2015
balance sheet showed net fixed assets of $1.51 million. The company’s 2015 income statement showed a
depreciation expense of $137,000. What was the company’s net capital spending for 2015?
Answer
Net capital spending = Δ Net PPE + Depreciation + Book Value of PPE sold
= $1.51 million – $1.32 million + $137,000 + $0
= $327,000
7. Building a Balance Sheet
The following table presents the long-term liabilities and stockholders’ equity of Information Control
Corp. one year ago:
Long-term debt $ 55,000,000

Preferred stock 3,100,000
Common stock ($1 par value) 12,000,000
Accumulated retained earnings 119,000,000
Capital surplus 56,000,000
Page | 13
During the past year, the company issued 5 million shares of new stock at a total price of $63 million, and
issued $30 million in new long-term debt. The company generated $8 million in net income and paid $1.8
million in dividends. Construct the current balance sheet reflecting the changes that occurred at the
company during the year.
Answer
The company issued 5 million shares of new stock at a total price of $63 million. These shares have a par
value of $1. That means, 5 million shares will have a par value of $5 million. But the shares have been
issued at a total price of $63 million. Of the $63 million, if we classify $5 million as common stock, the
remaining $58 million would be classified as capital surplus.
Items on the balance sheet would appear as follows:
Common stock ($1 par value) $12 million + $5 million = $17 million
Preferred stock $3.1 million
Long-term debt $55 million + $30 million = $85 million
Accumulated retained earnings $119 million + $8 million – $1.8 million = $125.2 million
Capital surplus $56 million + $58 million = $114 million
8. Cash Flow to Creditors
The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed long-term debt of $1.625 million, and the
2015 balance sheet showed long-term debt of $1.73 million. The 2015 income statement showed an
interest expense of $185,000. What was the firm’s cash flow to creditors during 2015?
Answer
Cash flow to creditors = Cash interest paid – net new borrowing

= $185,000 – ($1,730,000 – $1,652,000)
= $185,000 – $78,000
= $107,000
Page | 14
9. Cash Flow to Stockholders
The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed $510,000 in the common stock account and
$3.6 million in the additional paid-in surplus account. The 2015 balance sheet showed $545,000 and $3.85
million in the same two accounts, respectively. If the company paid out $275,000 in cash dividends during
2015, what was the cash flow to stockholders for the year?
Jordan’s Golf Shop

Partial Balance Sheet
2014 2015
Common Stock $ 510,000 $ 545,000
Additional Paid-in Surplus (share premium) 3,600,000 3,850,000
Answer
We can see common stock has gone up by $35,000 while additional paid-in surplus has gone up by
$250,000. So, the company has issued shares and raised a total of $35,000 + $250,000 = $285,000 from
shareholders. At the same time, the company paid out $275,000 in cash dividends.
Money raised from shareholders (inflow): $285,000

Money distributed among shareholders (outflow): 275,000
Net cash inflow from transactions with shareholders: $ 10,000
10. Calculating Cash Flows
Given the information for Jordan’s Golf Shop, Inc., in the previous two problems, suppose you also know
that the firm’s net capital spending for 2015 was $975,000 and that the firm reduced its net working
capital investment by $132,000. What was the firm’s 2015 operating cash flow, or OCF?
Answer
Net capital spending (ICF): $975,000 outflow

Net Investment in Net Working Capital (132,000) inflow
CF from transactions with debtholders: 107,000 (from problem prior to the previous problem) outflow
CF from transactions with stockholders: ( 10,000) inflow
According to the treasurer’s rule:
CF (A) = CF (B) + CF (C)

OCF – NINWC – ICF = CF (B) + CF (S)
FCF = CF from transactions with debtholders + CF from transactions with stockholders
OCF – ($132,000) – $975,000 = $107,000 + ($10,000)

Or, OCF + $132,000 – $975,000 = $107,000 – $10,000
Or, OCF = $107,000 - $10,000 – $132,000 + $975,000
Or, OCF = $940,000
Page | 15
Alternatively:
OCF: Unknown
ICF: $975,000 outflow, so negative!

NINWC: $132,000 inflow because the company reduced its investment in NWC, so positive!
FCF (Debtholders): $107,000 outflow, so negative!
FCF (Stockholders): $10,000 inflow, so positive!
The sum of all cash flows should be zero.
OCF – $975,000 + $132,000 – $107,000 + $10,000 = 0

Therefore, OCF = $975,000 – $132,000 + $107,000 – $10,000
= $940,000
11. Cash Flows
Ritter Corporation’s accountants prepared the following financial statements for year-end 2015:
a. Explain the change in cash during 2015.

b. Determine the change in net working capital in 2015.
c. Determine the cash flow generated by the firm’s assets during 2015.
RITTER CORPORATION
Income Statement
2015
Revenue $785
Expenses 575
Depreciation 90
Net income 120
Dividends 95
RITTER CORPORATION
Balance Sheet
December 31
2015 2014
Assets
Cash $ 80 $ 60
Other current assets 185 170
Net fixed assets 405 385
Total assets 670 615
Liabilities and Equity
Accounts payable $140 $125
Long-term debt 160 150
Stockholders’ equity 370 340
Total liabilities and equity 670 615
Page | 16
Answer
Change in cash was $80 – $60 = $20
To explain change in cash, we will have to prepare an accounting cash flow statement.
OCF: Net income + Depreciation – Increase in other current assets + Increase in accounts payable
= $120 + $90 – $15 + $15
= $210
ICF: Δ Net fixed assets + Depreciation

= ($405 – $385) + $90
= $20 + $90
= $110 Outflow
FCF:
Cash Flow from debtholders: $10
Cash Flow from Stockholders $5* – Dividends of $95 = – $90
Net FCF = $10 – $90 = – $80
* Although stockholders’ equity increased by $30, $25 of this $30 was due to an increase in retained
earnings. Therefore, only $5 of increase can be attributable to transactions with shareholders, such as
issue of shares for cash.
OCF + ICF + FCF = Change in Cash

$210 – $110 – $80 = $20
Change in NWC in 2015:
NWC2015 – NWC2014
= ($185 – $140) – ($170 – $125)
= $45 – $45
=0
(c) Determine the cash flow generated by the firm’s assets: CF (A)
To answer this question, we would need to prepare a financial cash flow statement.
In order to do that, we have to recast the income statement to identify EBIT.
RITTER CORPORATION
Income Statement
2015
Revenue $785
Expenses 575
Depreciation 90
Net income 120
Dividends 95
Page | 17
The above income statement does not have interest expense or tax, therefore, net income is the same as
EBIT.
Step 1: NINWC
Remember, for financial CF statement, NWC includes all current assets, i.e., cash and cash equivalents not
excluded in calculating NWC.
NWC2015 – NWC2014
= ($265 – $140) – ($230 – $125)
= $125 – $105
= $20
Step 2: OCF
EBIT – Current taxes paid + Depreciation

OCF = $120 – 0 + $90
= $210
Cash generated by firm’s assets = OCF – ICF – NINWC

= $210 – $110 - $20
= $80
Proof:
CF (A) = CF (B) + CF (S)

$80 = – $10 + $90
Or, $80 = $80
12. Financial Cash Flows
The Stancil Corporation provided the following current information:
Proceeds from long-term borrowing $17,800 FCF (Debtholders) Inflow

Proceeds from the sale of common stock 5,000 FCF (Stockholders) Inflow
Purchases of fixed assets 27,000 ICF Outflow
Purchases of inventories 2,300 (OCF) Outflow
Payment of dividends 15,200 (FCF Stockholders) Outflow
Determine the cash flows from the firm and the cash flows to investors of the firm.
Answer
CF (A) = CF (B) + CF (S)

CF (B) = ($17,800)
CF (S) = $15,200 – $5,000 = $10,200
ICF = $27,000
OCF – ICF – NINWC = CF (Debtholders) + CF (Stockholders)
Page | 18
OCF – $27,000 – $2,300 = – $17,800 + $10,200
OCF – $29,300 = – $7,600
OCF = – $7,600 + $29,300

= $21,700
Cash Flows from the firm and cash flows to investors are – $7,600 each.
13. Building an Income Statement
During the year, the Senbet Discount Tire Company had gross sales of $925,000. The firm’s cost of goods
sold and selling expenses were $490,000 and $220,000, respectively. Senbet also had notes payable of
$740,000. These notes carried an interest rate of 4 percent. Depreciation was $120,000. Senbet’s tax rate
was 35 percent.
a. What was Senbet’s net income?

b. What was Senbet’s operating cash flow?
Sales $ 925,000
Cost of goods sold 490,000
Gross profit 435,000
Selling expenses 220,000
Interest expense ($740,000 * 0.04) 29,600
Taxes 22,890
Net income $ 42,510
Answer
(a) Net income was $42,510 and

(b) Operating Cash Flow was
OCF = EBIT – Taxes + Depreciation
= $95,000 – $22,890 + $120,000
= $192,110
Page | 19
14. Calculating Total Cash Flows
Schwert Corp. shows the following information on its 2015 income statement:
Sales $215,000;
Costs $117,000;
Other expenses $6,700;
Depreciation expense $18,400;
EBIT $72,900;
Interest expense $10,000;
Taxes $25,370;
Net income $37,530;
Dividends $9,500.
In addition, you’re told that the firm issued $8,100 in new equity during 2015 and redeemed $7,200 in
outstanding long-term debt.
a. What is the 2015 operating cash flow?

b. What is the 2015 cash flow to creditors?
c. What is the 2015 cash flow to stockholders?
d. If net fixed assets increased by $28,400 during the year, what was the addition to net working capital
(NWC)?
Answer
a. OCF = EBIT – Current taxes + Depreciation

= $72,900 – $25,370 + $18,400
= $65,930
b. Cash flow to creditors:
= Interest paid – Proceeds from net new debt
= $10,000 + $7,200
= $17,200
c. Cash flow to stockholders:
Dividends + Stock repurchase – Cash proceeds from new stock issues
= $9,500 + $0 – $8,100
= $ 1,400
d. OCF – ICF – NINWC = CF (debt) + CF (stock)
$65,930 – $28,400 – NINWC = $17,200 + $1,400
NINWC = $65,930 – $28,400 – $17,200 – $1,400
NINWC = $18,930
Page | 20
15. Using Income Statements
Given the following information for O’Hara Marine Co., calculate the depreciation expense:
Sales $44,000;
Costs $27,500;
Addition to retained earnings $5,200;
Dividends paid $1,670;
Tax rate: 40 percent.
Workings:
Net income = dividends + addition to retained earnings

= $1,670 + $5,200 = $6,870
Tax is 40%, so net income is 60% of taxable income.

Taxable income, therefore, = $6,870 ÷ 0.60
= $11,450
Taxable income + interest expense = EBIT

EBIT, therefore, = $11,450 + $1,850
= $13,300
Sales – costs – depreciation = EBIT

Since EBIT = $13,300,
sales – costs – EBIT = depreciation

Or, $44,000 – $27,500 – $13,300 = depreciation
= $3,200
Income statement
Sales $44,000;
Costs $27,500;
Earnings before interest, taxes, and depreciation: $16,500
Depreciation expense $3,200;
EBIT $13,300;
Taxes $4,580;
Net income $6,870;
Dividends $1,670
Addition to retained earnings: $5,200
Answer: $3,200
Page | 21
16. Residual Claims
Josipovich, Inc., is obligated to pay its creditors $11,300 very soon.
a. What is the market value of the shareholders’ equity if assets have a market value
of $12,400?
b. What if assets equal $9,600?
Answer
a. Market value of equity = market value of assets – debt = $12,600 – $11,300

b. If assets equal $9,600, market value of equity would be $9,600 – $11,300 = – $1,700. As equity
cannot be negative, it will be zero.
18. Net Income and OCF
During 2015, Rainbow Umbrella Corp. had sales of $590,000. Cost of goods sold, administrative and selling
expenses, and depreciation expenses were $455,000, $85,000, and $125,000, respectively. In addition,
the company had an interest expense of $65,000 and a tax rate of 35 percent. (Ignore any tax loss
carryback or carryforward provisions.)
a. What is the company’s net income for 2015?

b. What is its operating cash flow?
c. Explain your results in (a) and (b).
Sales $ 590,000
Gross profit 135,000
Administrative and selling expenses 85,000
Operating profit (loss) or EBIT ( 75,000)
Taxable income ( 140,000)
Taxes 0
Net income $ (140,000)
Answer
Net income is ($140,000) and

OCF = NI + Depreciation = ($140,000) + $125,000 = ($15,000)
Page | 22
19. Accounting Values versus Cash Flows
In Problem 18, suppose Rainbow Umbrella Corp. paid out $34,000 in cash dividends. Is this possible? If
spending on net fixed assets and net working capital was zero, and if no new stock was issued during the
year, what was the change in the firm’s long-term debt account?
Answer
Yes, this is possible. As OCF was negative $15,000, if Rainbow was to pay out dividend, its long-term debt
account would increase by $15,000 + $34,000 = $49,000.
Proof:
OCF – ICF – NINWC = CF(B) + CF (S)
– $15,000 – $0 – $0 = CF(B) + $34,000
CF(B) therefore, would be equal to – $34,000 – $15,000 = – $49,000
Page | 23
Cusic Industries had the following operating results for 2015: sales $20,300; cost of goods sold $14,500;
depreciation expense $2,900; interest expense $690; dividends paid $660. At the beginning of the year,
net fixed assets were $15,470, current assets were $4,630, and current liabilities were $2,520. At the end
of the year, net fixed assets were $17,120, current assets were $5,345, and current liabilities were $2,785.
The tax rate for 2015 was 40 percent.
a. What is net income for 2015?

b. What is the operating cash flow for 2015?
c. What is the cash flow from assets for 2015? Is this possible? Explain.
d. If no new debt was issued during the year, what is the cash flow to creditors? What
is the cash flow to stockholders? Explain and interpret the positive and negative signs
of your answers in (a) through (d).
Answer
Cusic Industries
Income Statement
For the year ending ……..2015
Sales $ 20,300
Gross profit 5,800

Interest expense 690
Taxes 884
Net income $ 1,326
Dividends paid $ 660
Addition to retained earnings $ 666
ICF: Net Fixed Assets at the end-of-the-year – Net Fixed Assets at the beginning-of-the-year + depreciation
= $17,120 – $15,470 + $2,900
= $1,650 + $2,900
= $4,550
NINWC
NINWC = NWC at the end-of-the-year – NWC at the beginning-of-the-year

= ($5,345 – $2,785) – ($4,630 – $2,520)
= $2,560 – $2,110
= $450
Page | 24
OCF (financial)
OCF = EBIT + Depreciation – Current Taxes

=$2,900 + $2,900 – $884
= $4,916
Cash Flow from assets CF (A)
CF (A) = OCF – ICF – NINWC

= $4,916 – $4,550 – $450
= $ (84)
Yes, this, i.e., a negative CF (A), is possible.
(d) (d) Cash flow to creditors CF(C)

If no new debt was issued, the cash flow to creditors will be just the cash interest paid, which, in this
case, is the same as interest expense of $690. CF (C) = $690
Cash flow to stockholders CF(S):
CF (A) = CF(B) + CF (S)

Or, $ (84) = $690 + $ (774)*
*CF (S) was negative, i.e., the company has raised money from stockholders to pay the creditors and meet
its ICF and NINWC while its OCF was negative. How much money did the company raise from stockholders
during the year? We know the company paid $660 in dividends. If CF(S) was – $774 in spite of the $660 in
dividend payouts, the actual amount raised from stockholders must have been $660 + $774 = $1,434.
There is another way to check this.
If we try to draw up the company’s beginning-of-the-year and end-of-the-year balance sheets, we can find
the change in its equity over the year as no new debt was issued during the year [see (d) above]. And that
change in equity must be $1,434 + additions to retained earnings of $666 = $2,100. Additions to retained
earnings automatically increases equity. So, we need to find the extra $1,434 to check if our answers are
correct.
Balance Sheets
End-of- Beginning- End-of- Beginning-
the-year of-the- the-year of-the-
2015 year 2015 2015 year 2015
Liabilities and Assets
Stockholders’ Equity
Current liabilities $2,785 $2,520 Current assets $5,345 $4,630
Long-term debt unknown unknown Net fixed assets 17,120 15,470
Stockholders’ equity unknown unknown
Total liabilities and $ 22,465 $ 20,100 Total assets $ 22,465 $ 20,100
stockholders’ equity
Page | 25
In the above balance sheets, although long-term debt and stockholders’ equity numbers are unknown,
we know their totals. Their total at the end-of-the-year was $22,465 – $$2,785, which is $19,680 while
their total at the beginning-of-the-year was $20,100 – $2,520, which was $17,580. The change in their
totals was $19,680 – $17,580, which was $2,100. As the company issued no new debt during the year,
there has been no change in long-term liability balances. That means the full, $2,100, change occurred in
stockholders’ equity. Stockholders’ equity increased by $2,100. This increase can happen either by
additions to retained earnings or by issue of new equity, or both. From the income statement we can see
that the company added $666 to retained earnings during the year [ Net income was $1,326 and dividends
were $660, leaving $666 as retained earnings to be added to equity]. That means the amount of new
equity raised was $2,100 – $666 = $1,434.
CF (S) = Dividends – Cash proceeds from new issue of equity

CF (S) = $660 – $1,434
= $774
Consider the following abbreviated financial statements for Weston Enterprises:
WESTON ENTERPRISES WESTON ENTERPRISES

2015 and 2014 Partial Balance Sheets Income Statement
2015 2014 2015 2014 Sales $14,740

Current assets $ 1,176 $ 964 Current liabilities $ 445 $ 401 Costs 5,932
Net fixed assets 5,104 4,384 Long-term debt 2,713 2,380 Depreciation 1,190
Total liabilities 3,158 2,781 Interest paid 328
Stockholders’ equity 3,122 2,567
Total assets $ 6,280 $ 5,348 Total liabilities and $ 6,280 $5,348
stockholders’ equity
a. What is owners’ equity for 2014 and 2015?

b. What is the change in net working capital for 2015?
c. In 2015, Weston Enterprises purchased $2,350 in new fixed assets. How much in fixed assets did Weston
Enterprises sell? What is the cash flow from assets for the year? (The tax rate is 40 percent.)
d. During 2015, Weston Enterprises raised $455 in new long-term debt. How much long-term debt must
Weston Enterprises have paid off during the year? What is the cash flow to creditors?
Answer
a. Owners’ equity for 2014 and 2015 are $3,122 and $2,567 respectively.
b. Change in NWC for 2015:
NWC2015 – NWC2014
= ($1,176 – $445) – ($964 - $401)
= $731 – $563
= $168
Page | 26
c. Net Fixed Assets2015 = Net Fixed Assets2014 – Depreciation + Purchase of Fixed Assets – Sale of Fixed
Assets
Or, Purchase of Fixed Assets or ICF = Net Fixed Assets2015 – Net Fixed Assets2014 + Depreciation + Book
Value of Fixed Assets Sold
Or, $2,350 = $5,104 – $4,384 + $1,190 + BV of Fixed Assets Sold
Or, BV of Assets Sold = – $5,104 + $4,384 – $1,190 + $2,350

= $440
There are so many ways we can find it! The simplest way to think is the process of how the book values
of net fixed assets change on the balance sheet. The process is as follows:
Beginning balance……$4,384
Less: Depreciation…….1,190
Add New purchases….2,350
Less: Sale of assets…unknown
= Closing balance……$5,104
Or, change in net fixed assets = New purchases + Depreciation – BV of assets sold
Fixed asset balance can change for one or more of the following 3 reasons:
1) Depreciation
2) New purchases
3) Sale or disposal
Let’s express the above in an equation:
Closing balance = Beginning balance of PPE – Depreciation + New purchases – Sales

Or, Sales = Beginning balance of PPE – Depreciation + New purchases – Closing balance
Sales = $4,384 – $1,190 + $2,350 – $5,104
= $440
Therefore, sale of fixed assets = $440
d. During 2015, Weston Enterprises raised $455 in new long-term debt. How much long-term debt must
Weston Enterprises have paid off during the year? What is the cash flow to creditors?
Let’s see how long-term debt balance changes. If we make new borrowings, it goes up and if we pay off
existing debt, it goes down.
That means, change in long-term debt (LTD) = new borrowings – repayments

Therefore, $2,713 – $2,380 = $455 – repayments
Or, repayments = $455 – $2,713 + $2,380
= $122
Page | 27
Cash flow to creditors:
Cash flow to creditors = interest paid – net new borrowings

= $328 – (new debt – repayments of existing debt)
= $328 – new debt + repayments of existing debt
= $328 – $455 + $122
= – $5
The company paid $328 in interest but raised a net of $333 in new debt, leading to a net cash flow of
negative $5 to creditors.
Page | 28
Use the following information for Ingersoll, Inc., for Problems 22 and 23 (assume the tax rate
is 34 percent):
2014 2015
Sales $ 9,402 $ 10,091
Depreciation 1,350 1,351
Cost of goods sold 3,235 3,672
Other expenses 767 641
Interest 630 724
Cash 4,931 6,244
Short-term notes payable 953 895
Long-term debt 16,152 19,260
Net fixed assets 41,346 42,332
Accounts payable 5,179 5,022
Inventory 11,604 11,926
Dividends 1,147 1,261
22. Financial Statements
Draw up an income statement and balance sheet for this company for 2014 and 2015.
2014 2015
Sales $ 9,402 $10,091
Cost of goods sold 3,235 3,672
Gross profit 6,167 6,419
Depreciation expense 1,350 1,351

Other expenses 767 641
Total operating expenses 2,117 1,992
Operating profit or EBIT 4,050 4,427
Interest expense 630 724
Taxable income 3,420 3,703
Taxes 1,163 1,259
Net income $ 2,257 2,444
Dividends $ 1,147 $ 1,261
Additions to retained earnings $ 1,110 $ 1,183
Page | 29
Balance Sheets
As at December 31,
Liabilities and 2014 2015 Assets 2014 2015

Stockholders’ Equity
Current liabilities Current assets
Accounts payable $ 5,179 5,022 Cash $ 4,931 $ 6,244
Short-term notes payable 953 895 Accounts receivable 6,527 7,352
Total current liabilities 6,132 5,917 Inventory 11,604 11,926
Long-term debt 16,152 19,260 Total current assets $ 23,062 $ 25,522
Total liabilities $ 22,284 $ 25,177
Stockholders’ equity 42,124 42,677 Net fixed assets 41,346 42,332

Total liabilities and
stockholders’ equity $ 64,408 $ 67,854 Total assets $ 64,408 $ 67,854
23. Calculating Cash Flow
For 2015, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
Answer
Step 1: NINWC
NWC2015 – NWC2014
= ($25,522 – $5,917) – ($23,062 – $6,132)
= $19,605 – $16,930
= $2,675
Step 2: OCF
OCF = EBIT – Current taxes + Depreciation

= $4,427 – $1,259 + $1,351
= $4,519
Step 3: ICF
Δ Net Fixed Assets + Depreciation + BV of PPE sold (if any)

$42,332 – $41,346 + $1,351 + n/a
= $2,337
Step 4: FCF
CF to creditors = Interest paid – Net new debt

= $724 – ($19,260 – $16,152)
= – $2,384
Page | 30
CF to stockholders = Dividend + Stock repurchase – Cash proceeds from new stock issues
= $1,261 + n/a – ($42,677 – $42,124 – $1,183)
= $1,891
CF (A) = CF(B) + CF(S)

OCF – ICF – NINWC = CF (Creditors) + CF (Stockholders)
$4,519 – $2,337 – $2,675 = – $2,384 + $1,891
Or, – $493 = – $493
24. Cash Flows
You are researching Time Manufacturing and have found the following accounting statement of cash flows
for the most recent year. You also know that the company paid $84 million in current taxes and had an
interest expense of $41 million.
Use the accounting statement of cash flows to construct the financial statement of cash flows.
TIME MANUFACTURING
Statement of Cash Flows
($ in millions)
Cash flow from operating activities
Net income $192

Depreciation 76
Deferred taxes 13
Changes in operating current assets and liabilities:
Accounts receivable – $16
Inventories 17
Accounts payable 13
Accrued expenses – $7
Other 2
Total cash flow from operations $290
Investing activities
Acquisition of fixed assets – $198
Sale of fixed assets 21
Total cash flow from investing activities – $177
Cash flow from financing activities
Retirement of long-term debt – $150

Proceeds from long-term debt sales 115
Change in notes payable 8
Dividends – 81
Repurchase of stock – 11
Proceeds from new stock issue 43
Total cash flow from financing activities – $76
Change in cash (on balance sheet) 37
Page | 31
Answer
First, we will have to draw the income statement by working backward from net income up to EBIT.
EBIT $330
Less: Interest expense 41
Earnings before taxes 289

Taxes:
Current 84
Deferred 13
Net income $192
Financial Cash Flow Statement
Step 1: NINWC
This part is the trickiest. First, we have to understand how this part of the accounting cash flow
statement works. In this part, net income is adjusted for non-cash and non-operating items and for
changes in operating current assets and liabilities. If an operating current asset increases, it is deducted
and vice-versa for operating current liabilities. Please note while an increase in a current asset
constitutes an investment in working capital, it’s shown as a reduction to OCF. Quite rightly so because
investment in anything – working capital or long-term assets – does absorb cash flow, so cash flow goes
down as working capital goes up.
The financial cash flow statement calculates investment in net working capital. Increases in current
assets are considered positive because they constitute investments in NWC and vice-versa for
decreases. Here is the difference between the procedures followed in preparing the two cash flow
statements. Items that are treated positives in the accounting CF statement are treated negatives in the
financial CF. Therefore, we alter all the signs of the changes in current assets and liabilities, except for
cash, in converting the accounting CF statement into a financial one.
Cash $ 37 increase in cash = increase in working capital

Accounts receivable – 16 decrease in cash flow = increase in working capital
Inventories 17 increase in cash flow = decrease in working capital
Accounts payable 13 increase in cash flow = decrease in working capital
Accrued expenses – 7 decrease in cash flow = increase in working capital
Other 2 increase in cash flow = decrease in working capital
Net change, or, net investment in NWC $ 28
We have calculated it as follows: $37 + $16 – $17 – $13 + $7 – $2 = $28
Step 2: Calculation of OCF

OCF = EBIT – Current taxes + Depreciation
= $330 – $84 + $76
= $322
Page | 32
Step 3: ICF or capital expenditure
As in the accounting cash flow statement
ICF = $177
Step 4: FCF
FCF (debtholders):
Interest expense $ 41
Retirement of long-term debt 150
Proceeds from long-term debt sales (115)
Change in notes payable (8)
Net cash flow from transactions with creditors: $ 68
FCF (stockholders):
Dividends $ 81
Repurchase of stock 11
Proceeds from new stock issue (43)
Net cash flow from transactions with stockholders $ 49
Proof
OCF – ICF – NINWC = CF (debtholders) + CF (stockholders)

Or, $322 – $28 – $177 = $68 + $49
Or, $117 = $117
25. Net Fixed Assets and Depreciation
On the balance sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account,
which records the acquisition cost of fixed assets, minus the accumulated depreciation (AD) account,
which records the total depreciation taken by the firm against its fixed assets. Using the fact that NFA =
FA – AD, show that the expression given in the chapter for net capital spending, NFAend = NFAbeg + D
(where D is the depreciation expense during the year), is equivalent to FAend – FAbeg.
Answer
Net capital spending = NFAend – NFAbeg + Depreciation
= (NFAend – NFAbeg) + (Depreciation + ADbeg) – ADbeg
= (NFAend – NFAbeg)+ ADend – ADbeg
= (NFAend + ADend) – (NFAbeg + ADbeg)

= FAend – FAbeg
Page | 33
Mini Case: CASH FLOWS AT WARF COMPUTERS, INC.
Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer. The small initial
investment to start the company was made by Nick and his friends. Over the years, this same group has
supplied the limited additional investment needed by the company in the form of both equity and short-
and long-term debt. Recently the company has developed a virtual keyboard (VK). The VK uses
sophisticated artificial intelligence algorithms that allow the user to speak naturally and have the
computer input the text, correct spelling and grammatical errors, and format the document according to
preset user guidelines. The VK even suggests alternative phrasing and sentence structure, and it provides
detailed stylistic diagnostics. Based on a proprietary, very advanced software/hardware hybrid
technology, the system is a full generation beyond what is currently on the market. To introduce the VK,
the company will require significant outside investment.
Nick has made the decision to seek this outside financing in the form of new equity investments and bank
loans. Naturally, new investors and the banks will require a detailed financial analysis. Your employer,
Angus Jones & Partners, LLC, has asked you to examine the financial statements provided by Nick. Here
are the balance sheets for the two most recent years and the most recent income statement:
WARF COMPUTERS
Balance Sheet
($ in thousands)
2015 2014 2015 2014
Current assets Current liabilities
Cash and equivalents $ 452 $ 391 Accounts payable $ 519 $ 485
Accounts receivable 716 668 Accrued expenses 247 401
Inventories 641 663 Total current liabilities $ 766 $ 886
Other 92 78 Long-term liabilities:
Total current assets $ 1,901 $ 1,800 Deferred taxes $ 330 $ 59
Fixed assets Long-term debt 1,179 1,148
Property, plant, and equipment $ 4,148 $ 3,179 Total long-term liabilities $ 1,509 $ 1,307
Less accumulated depreciation 1,340 1,092 Stockholders’ equity:
Net property, plant, and $ 2,808 $ 2,087 Preferred stock $ 21 $ 21
equipment
Intangible assets and others 793 709 Common stock 126 126
Total fixed assets $ 3,601 $ 2,796 Capital surplus 794 779
Accumulated retained 2,478 1,603
earnings
Less treasury stock 192 126
Total equity $ 3,227 $ 2,403
Total liabilities and
Total assets $ 5,502 $ 4,596 shareholders’ equity $ 5,502 $ 4,596
Nick has also provided the following information: During the year the company raised $228,000 in new
long-term debt and retired $197,000 in long-term debt. The company also sold $15,000 in new stock and
repurchased $66,000 in stock. The company purchased $1,482,000 in fixed assets and sold $429,000 in
fixed assets.
Page | 34
WARF COMPUTERS
Income Statement
($ in thousands)
Sales $7,557
Selling, general, and administrative expense 848
Depreciation 248
Operating income $2,005
Other income 75
EBIT $2,080
Interest expense 137
Pretax income $1,943
Taxes 776
Current: $605
Deferred: 171
Net income $1,167
Dividends $ 292
Retained earnings $ 875
Angus has asked you to prepare the financial statement of cash flows and the accounting statement of
cash flows. He has also asked you to answer the following questions:
1. How would you describe Warf Computers’ cash flows?

2. Which cash flow statement more accurately describes the cash flows at the company?
3. In light of your previous answers, comment on Nick’s expansion plans.
Mini Case on Page 42 (11th Edition)
Cash Flows at Warf Computers, Inc.

capital (NINWC)
2015 2014
Current Assets: $1,901 Current Assets: $1,800
Current Liabilities 766 Current Liabilities 886
Working Capital: $1,135 Working Capital: $ 914
= $1,135 – $914 = $221
Page | 35
OCF = EBIT + Depreciation – Current Taxes OCF = Net income $1,167

= $2,080 + $248 – $605 = $1,723 + Depreciation………… 248
– Increase in accounts receivable..…48
+ Decrease in inventories……………….22
– Increase in other current assets....14
+ Increase in accounts payable………34
– Decrease in accrued expenses…..154
+ Increase in deferred taxes………….171
= OCF………………………….…………...$1,426
Assets Assets
= ($2,808 – $2,087) + $248 + ($793 – $709) = ($2,808 – $2,087) + $248 + ($793 – $709)
= $721 + $248 + $84 = $721 + $248 + $84
= $1,053 = $1,053
= Interest + Debt retirement – Proceeds from = Debt retirement – Proceeds from long-term
long-term debt sales debt sales
= Interest paid – net new borrowing = net new borrowing
= Interest paid – (Ending long-term debt – = Ending long-term debt – Beginning long-term
Beginning long-term debt) debt
= $137 – ($1,179 – $1,148) = $1,179 – $1,148

= $137 – $31 = $31
= $106 outflow = ($228 – $197)
= $31 inflow
Alternatively, using the information provided as
additional information beyond what is provided
in the balance sheet or the income statement:
Cash flow to creditors = interest paid + debt

retirement – proceeds from new debt issues
= $137 + $197 – $228
= $137 – $31
= $106 outflow
= $292 – ($15 – $66) = $292 – ($15 – $66)
Page | 36
= $292 + $51 = $292 + $51
= $343 outflow = $343 outflow
Proof: Proof:
(Stockholders)
$1,426 + ($1,053) + $31 + ($343) = $452 – $391
Or, CF (A) = CF (B) + CF (S) Or, $61 = $61
Or, $1,723 – $1,053 – $221 = $106 + $343
Or, $449 = $449 
Page | 37

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North South University

EMB 660: Corporate Finance

Problem 11-45 Statement of Cash Flows (Indirect Method)

Liabilities and Stockholders’ Equity

New equipment purchase:

Gross PPE of 2019: $360,000

Using the net method:

= $282,000 – $166, 000 + $22,000 + $45,000

Net ICF will be:

Purchase of new PPE $183,000

Historical Cost at the end of 2018: $222,000

5. Cash paid for interest:

Cash Flow Statements

Financial Cash Flow Accounting Cash Flow

Current Liabilities: Current Liabilities:

Step 2: Calculate OCF: Step 2: Calculate OCF:

OCF = EBIT + Depreciation + Amortization –

Cash purchase of PPE: $ 183 Cash purchase of PPE: $ 183

Dair Company’s income statement and comparative balance sheets follow.

Liabilities and Stockholders’ Equity

Historical cost: $36,000

Historical Cost at the end of 2018: $336,000

12. Analysis of intangible assets:

13. Cash paid for interest:

Cash Flow Statements

Financial Cash Flow Accounting Cash Flow

Current Liabilities: Current Liabilities:

OCF = EBIT + Depreciation + Amortization –

Cash purchase of PPE: $ 0 Cash purchase of PPE: $ 0

1. Building a Balance Sheet

Assets Liabilities and Stockholders’

Net fixed assets 25,000 Long-term debt 10,300

Total liabilities $14,400

Total assets $ 29,900 $ 29,900

Net working capital = Current assets minus current liabilities

3. Market Values and Book Values

Total assets $ 8,400,000 $ 9,100,000

Book value: $8,400,000 and

OCF = EBIT – current taxes + depreciation

6. Calculating Net Capital Spending

7. Building a Balance Sheet

Long-term debt $ 55,000,000

Items on the balance sheet would appear as follows:

8. Cash Flow to Creditors

Cash flow to creditors = Cash interest paid – net new borrowing

Jordan’s Golf Shop

Money raised from shareholders (inflow): $285,000

10. Calculating Cash Flows

Net capital spending (ICF): $975,000 outflow

According to the treasurer’s rule:

CF (A) = CF (B) + CF (C)

OCF – ($132,000) – $975,000 = $107,000 + ($10,000)

ICF: $975,000 outflow, so negative!

The sum of all cash flows should be zero.

OCF – $975,000 + $132,000 – $107,000 + $10,000 = 0

11. Cash Flows

a. Explain the change in cash during 2015.

Change in cash was $80 – $60 = $20