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Generally Accepted Accounting Principles and Net Fixed Assets

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Generally Accepted Accounting Principles and Net Fixed Assets
21. Calculating Cash Flows. Xu Tong Manufacturers had the following operating results for 2010: sales = $19, 780; cost of goods sold =
$13,980; depreciation expenses = $2,370; interest expense = $345; dividends paid = $400. At the beginning of the year, net fixed assets were $13,800, current assets were $2,940 and current liabilities were
$2,070. At the end of the year, net fixed assets were $16,340, current assets were $3,280, and current liabilities were $2,160. The tax rate for 2010 was 35 percent.
a. What is net income for 2010?
Net income
= Revenue – Expenses
= Net sales – Cost of goods sold – Depreciation – Interest paid – Taxes
= ($19,780 - $13,980 - $2,370 -$345) x (1-35%)
= $3,085 x 0.65
= $2,005

b. What is the operating cash flow for 2010?
Operating cash flow
= Earnings before interest and taxes + Depreciation –
Taxes
= ($19,780 - $13,980 - $2,370) + $2,370 – ($3,085 x
35%)
= $3,430 + $2,370 - $1079.75
= $4,720

c. What is the cash flow from assets for 2010? Is this possible?
Explain.
Cash flow from assets
= Operating cash flow – Net capital spending – Changes in
NWC
= $4,720 – ($16,340 - $13,800 + $2,370) – [(3,280 – 2,160) –
(2,940 -$2,070)]
= $4,720 - $4,910 - $250
= -$440
It is possible that the cash flow from assets are negative.
Because it positive or negative are represent the firm distributed funds to the shareholders and creditors or they pay money to buy the assets to help the firm raised funds respectively. And in this case, we can find out that firms had to raise fund $440 from its shareholders and creditors to make their investment.

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 answer in (a) through (d).
Cash flow to creditors
= Interest paid – Net new borrowing
= $345 – 0 = $345
Cash flow to stockholders
Cash flow from assets = Cash flow to stockholders

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