Quarles Industries had the following operating results for 2015: sales = $28,860; cost of goods sold = $19,510; depreciation expense = $5,060; interest expense = $2,340; dividends paid = $1,200. At the beginning of the year, net fixed assets were $17,130, current assets were $5,810, and current liabilities were $3,320. At the end of the year, net fixed assets were $20,410, current assets were $7,360, and current liabilities were $3,930. The tax rate for 2015 was 34 percent.

Quarles Industries had the following operating results for 2015: sales = $28,860; cost of goods sold = $19,510; depreciation expense = $5,060; interest expense = $2,340; dividends paid = $1,200. At the beginning of the year, net fixed assets were $17,130, current assets were $5,810, and current liabilities were $3,320. At the end of the year, net fixed assets were $20,410, current assets were $7,360, and current liabilities were $3,930. The tax rate for 2015 was 34 percent.

  

a.	What is net income for 2015? (Do not round intermediate calculations.)

  

Net income

$

  

b.	What is the operating cash flow for 2015?  (Do not round intermediate calculations.)

  

Operating cash flow

$

c.	What is the cash flow from assets for 2015? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.)

Cash flow from assets

$

   

d-1	If no new debt was issued during the year, what is the cash flow to creditors? (Do not round intermediate calculations.)

  

Cash flow to creditors

$

  

d-2	If no new debt was issued during the year, what is the cash flow to stockholders? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.)

Cash flow to stockholders

$

 

Explanation:

a.

Income Statement
Sales	$	28,860
Cost of goods sold		19,510
Depreciation		5,060
EBIT	$	4,290
Interest		2,340
Taxable income	$	1,950
Taxes (34%)		663
Net income	$	1,287

  
b.

OCF = EBIT + Depreciation − Taxes

OCF = $4,290 + 5,060 − 663

OCF = $8,687

 
c.

Change in NWC = NWCend − NWCbeg

Change in NWC = (CAend − CLend) − (CAbeg − CLbeg)

Change in NWC = ($7,360 − 3,930) − ($5,810 − 3,320)

Change in NWC = $3,430 − 2,490

Change in NWC = $940

Net capital spending = NFAend − NFAbeg + Depreciation

Net capital spending = $20,410 − 17,130 + 5,060

Net capital spending = $8,340

CFA = OCF − Change in NWC − Net capital spending

CFA = $8,687 − 940 − 8,340

CFA = −$593

The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $593 in funds from its stockholders and creditors to make these investments.

 
d.

Cash flow to creditors = Interest – Net new LTD

Cash flow to creditors = $2,340 − 0

Cash flow to creditors = $2,340

Cash flow to stockholders = Cash flow from assets − Cash flow to creditors

Cash flow to stockholders = –$593 − 2,340

Cash flow to stockholders = −$2,933

  

We can also calculate the cash flow to stockholders as:

  

Cash flow to stockholders = Dividends − Net new equity

  

Solving for net new equity, we get:

Net new equity = Dividends − Cash flow to stockholders

Net new equity = $1,200 − (−2,933)

Net new equity = $4,133

  

The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $940 in new net working capital and $8,340 in new fixed assets. The firm had to raise $593 from its stakeholders to support this new investment. It accomplished this by raising $4,133 in the form of new equity. After paying out $1,200 of this in the form of dividends to shareholders and $2,340 in the form of interest to creditors, $593 was left to meet the firm’s cash flow needs for investment.