Operating Cash Flow: Operating Cash Flow is the type of cash flow where the cash is given or received in the course of routine business operations of the company.
Determine the total cash flow, operating cash flow and free flow cash flow of Rusco Company and determine the reason for a decline in the total cash balance.
Answer to Problem 13P
Solution: The total cash flow of Rusco Company show a net decrease of $13000, cash flow from operating activities shows a net decrease of $11000 and a net decrease of $141000 is registered in the free flow cash flow.
Negative free cash flow suggests that the company has not provided enough to its operating expenditure and has over incurred the capital expenditure.
Explanation of Solution
The operating cash flows and total cash flows are shown as under −
Particulars | Amount ($) |
CASH FLOW FROM OPERATING ACTIVITIES | |
Net Profit before tax | 30,000 |
Adjustment for Non-cash items / items | |
Loss on sale land | 2,000 |
Gain on sale of investments | (10,000) |
Operating Profit before change in | 22,000 |
Cash flow from operations before working capital changes | |
Increase / (Decrease) in Current Liabilities and Current Assets: | |
Accounts payable | 63,000 |
Accumulated | 11,000 |
Accrued Liabilities | (9,000) |
Income Taxes Payable | 8,000 |
Inventory | (50,000) |
Prepaid Expenses | 4,000 |
(40,000) | |
Cash flow from operations after working capital changes | 9,000 |
Income Taxes paid | (20,000) |
Net Cash Flow from Operating Activities | (11,000) |
CASH FLOW FROM INVESTING ACTIVITIES | |
Property Plant and Equipment | (1,30,000) |
Sale of Equipment | 8,000 |
Sale of Long term Investments | 30,000 |
Net Cash Flow from Investing Activities | (92,000) |
CASH FLOW FROM FINANCING ACTIVITIES | |
Bonds payable | 70,000 |
Common Stock | 20,000 |
Dividend paid | - |
Net Cash Flow from Financing Activities | 90,000 |
Net Increase/ (Decrease) in Cash and Cash Equivalents | (13,000) |
Opening Cash & Cash Equivalents | 21,000 |
Closing Cash & Cash Equivalents | 8,000 |
Steps to calculate the operating cash flow:
- The non −cash items like depreciation charged to
Profit and loss statement (and not the accumulated depreciation), provisions forbad debts are first added to the net income earned by the entity which gives the operating profit before it changes in working capital. - The operating profit is then adjusted as per the changes in the working capital that is increase/decrease in current assets and current liabilities of the business. This gives the cash flow from operating activities after the working capital changes.
- Direct taxes actually paid (and not just provided for) are then deducted from the cash flow from operations after working capital changes and this gives the net cash flow from operating activities.
Steps to calculate the investing cash flow:
Investing Cash Flow is one where there is a change in the capital structure of the company. These are usually made in the events of amalgamations, reconstructions, demergers and related events where the whole capital structure of the company is restructured. Hence, purchase of common stock or the purchase of an asset which are all long term investments made with the purpose of reaping long term benefits are termed as investing cash flows.
- The purchase of property, plant, equipment, land or any other tangible fixed asset is deducted from the total cash flows.
- The sale of property, plant, equipment, land or any other tangible fixed asset or investment or an asset held for reaping long term benefits is added to the total cash flows.
Steps to calculate financing cash flow:
Financial cash flows, as the name suggests, relate to the financial inflow and outflow of business. Repayment of debt, payment of interest and dividends are thus classified as financial cash flows.
It mainly relates to the inflow and outflow of the funds of the business and payment to the investors of long term capital in the company.
- The addition to the capital base of the company like purchase or buy-back of common stock, new loan taken, debt borrowed are added to the total cash flows.
- The repayment of debt or loan, sale of common stock, reduction in equity are deducted from the total cash flows.
- Financial interest or dividend paid are also considered as financing activities and are thus deducted from the total cash flows when paid by the company.
The free flow cash flow is as under −
Particulars | Amount ($) |
Cash Flow from Operating Activities | (11,000) |
Purchase of Property, Plant and Equipment | (1,30,000) |
Free Cash Flow | (1,41,000) |
The major reasons for decline in cash balances are as under-
- Unnecessary purchase of property, plant and equipments due to a lack of planning
- Increase in accounts receivables since cash was not timely recovered from debtors
- Increase in inventory resulting in huge non-moving stocks
The operating cash flow, the total cash flow and the free flow cash flows are thus calculated.
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Chapter 13 Solutions
INTRO.TO MANAG...(LL)-W/ACCESS >CUSTOM<
- During the year, Hepworth Company earned a net income of 61,725. Beginning and ending balances for the year for selected accounts are as follows: There were no financing or investing activities for the year. The above balances reflect all of the adjustments needed to adjust net income to operating cash flows. Required: 1. Prepare a schedule of operating cash flows using the indirect method. 2. Suppose that all the data are used in Requirement 1 except that the ending accounts payable and cash balances are not known. Assume also that you know that the operating cash flow for the year was 20,475. What is the ending balance of accounts payable? 3. CONCEPTUAL CONNECTION Hepworth has an opportunity to buy some equipment that will significantly increase productivity. The equipment costs 25,000. Assuming exactly the same data used for Requirement 1, can Hepworth buy the equipment using this years operating cash flows? If not, what would you suggest be done?arrow_forwardLucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the companys just completed financial statements. The following discussion took place between Lucas Hunter and Simmons controller, John Jameson, in January, after the close of the fiscal year: Lucas: Ive been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This wont look good to our shareholders. Is there anything we can do about this? John: What do you mean? The past is the past, and the numbers are in. There isnt much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I dont see much leeway for significant change at this point. Lucas: No, no. Im not suggesting that we cook the books. But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good newsand, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. John: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there. Lucas: This is true, but somehow I think this information should be given a much higher profile. I dont like this information being buried in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statementsomeplace under the earnings per share number. In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think? John: Ive never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, underneath the earnings per share amount. Users would really benefit from this disclosure. Thanks for the ideaIll start working on it. Lucas: Glad to be of service. How would you interpret this situation? Is John behaving in an ethical and professional manner?arrow_forwardStatement of Cash Flows Colorado Corporation was organized at the beginning of the year, with the investment of $250,000 in cash by its stockholders. The company immediately purchased an office building for $300,000, paying $210,000 in cash and signing a three-year promissory note for the balance. Colorado signed a five-year, $60,000 promissory note at a local bank during the year and received cash in the same amount. During its first year, Colorado collected $93,970 from its customers. It paid $65,600 for inventory, $20,400 in salaries and wages, and another $3,100 in taxes. Colorado paid $5,600 in cash dividends. Required Prepare a statement of cash flows for the year. What does this statement tell you that an income statement does not?arrow_forward
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