Cash Flow Identity and the Statement of Cash Flows (Slides 2-11 to 2-20)

2.2 Cash Flow Identity and the
Statement of Cash Flows (Slides 2-11 to 2-20)

Where;

Operating Cash Flow = EBIT + Depreciation – Taxes;

Net Capital Spending = Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation

Change in Net Working Capital = Ending NWC – Beginning NWC

Net Working Capital = Current Assets – Current Liabilities

Cash Flow to Creditors = Interest Expense – Net New Borrowing from Creditors

Net New Borrowing = Ending Long-term Liabilities – Beginning Long-term Liabilities

Net New Borrowing from Owners = Change in Equity

Change in Equity = Ending Common Stock and Paid-in-Surplus - Beginning Common Stock and Paid-in-Surplus

For J.F. & Sons,

Operating Cash Flow = -$2000+$125,000-0 = $123,000

Net Capital Spending = $500,000 - 0 + $125,000 = $625,000

Change in Net Working Capital = $448,000 - $1,000,000 = -552,000

So, Cash Flow from Assets = 123,000 - 625,000 - (-552,000)

= 675,000 - 625,000 = $50,000

Cash Flow to Creditors = $50,000 - $0 (since the loan amount was neither increased nor decreased)

Cash Flow to Owners = 0 (since no shares were issued or repurchased nor were any dividends paid)

Hence, the cash flow identity holds,

i.e., Cash Flow from Assets = $50,000 = Cash Flow to Creditors and Owners

Cash flow from Assets = Cash flow to Creditors + Cash flow to Owners