Chapter 2

PG 70 / 13, pdf- During the year, the Senbet Discount Tire Company had gross
sales of $865,000. The firm’s cost of goods sold and selling expenses were $455,000
and $210,000, respectively. The company also had notes payable of $680,000. These
notes carried an interest rate of 4 percent. Depreciation was $105,000. The tax rate
was 21 percent
a. What was Senbet’s net income?
b. What was Senbet’s operating cash flow?
A) Sales 865,000
B) Operating cash flow (OCF) =
Less: Cost
Less: Selling exp. (EBIT + Depreciation) – TAX
Less: Depreciation
EBIT 95,000
O.C.F = Ans
Less: Interest
Taxable Income
Less: Tax 21%
Number 5, pg 69
Net Income 53,562 - H,w
 During 2019, Rainbow Umbrella Corp. had sales of $630,000.
PG 70 /17, pdf-
Cost of goods sold, administrative and selling expenses, and depreciation
expenses were $465,000, $85,000, and $135,000, respectively. In addition,
the company had an interest expense of $70,000 and a tax rate of 21 percent.
a. What is Raines’s net income for 2012?
b. What is its operating cash flow?
c. Explain your results in (a) and (b).
B) Operating cash flow (OCF) =
A) Sales 6,30,000
Less: COGS (EBIT + Depreciation) – TAX
Less: Admin.& Sel.Exp.
= [ - 55,000 + 135,000 ] – 0
Less: Depreciation
EBIT O.C.F = $ 80,000 Ans
(55,000)
Less: Interest
Taxable Income
Less: Tax 21% 0 C) …...?
Net Income (1,25,000)
PG70--14 Schwert Corp. shows the following information on its 2019
income statement: sales = $246,000; costs = $135,000; other expenses = $7,100;
depreciation expense = $19,100; interest expense = $10,000; taxes = $18,876; dividends
= $9,800. In addition, you’re told that the firm issued $7,900 in new equity during 2019
and redeemed $6,800 in outstanding long-term debt
a. What was Senbet’s operating cash flow?

A) Sales 246,000
A) Operating cash flow (OCF) =
Less: Cost
Less: Other exp. (EBIT + Depreciation) – TAX
Less: Depreciation
EBIT 84,800
Less: Interest O.C.F = Ans

Taxable Income
Less: Tax
Net Income 55,924
B) What is the 2019 cash flow to creditors (CFC)?
C.F.C = [ Interest paid – Net new borrowing ]
C.F.C = [ 10,000 – (-6,800) ]
C.F.C = Ans

C) What is the 2019 cash flow to stockholders (CFS)?

C.F.S = [ Dividend paid – Net new Equity ]
C.F.S = [ 9,800 – 7,900 ]
C.F.S = Ans

D) If net fixed assets increased by $41,900 during the year,

what was the addition to Net Working Capital (NWC)?
Step 1
CFA = CFC + CFS
CFA =
CFA =

CFA = O.C.F – Net Capital Expend. – Δ NWC

 D) If net fixed assets increased by $41,900 during the year, what was the
addition to net working capital (NWC)?
CFA = 18,700 (calculated) Step 1

D) Step 2
Net Capital Expenditure
= [ Ending Fix Asset – Beg. Fixed Asset] + Depreciation
= 0r Net (increase or decrease) in Fixed Asset + Depreciation
= [ 41,900 + 19,100 ]
=

D) Step 3
CFA = O.C.F – Net Capital Expend. – Δ NWC

18,700 = 85,024 – 61,000 - Δ NWC

Δ NWC = (Ignore minus sign from both side)

Note:
🞂 Cash flow to stockholders (CFS) is the amount
of cash that a company pays out to its shareholders.

🞂 Cash flow to creditors (CFC) defines the value of earnings

that is paid to the debt holders during an accounting
period.
The End