Precision Manufacturing Operating Results
Precision Manufacturing Had The Following Operating Results For 2010
Precision Manufacturing had the following operating results for 2010: sales = $38,900; cost of goods sold = $24,600; depreciation expense = $1,700; interest expense = $1,400; dividends paid = $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate for 2010 was 34 percent. What is the cash flow from assets for 2010?
Paper For Above instruction
The cash flow from assets, often termed as free cash flow to the firm, measures the cash generated by a company's operating activities after accounting for capital expenditures and changes in net working capital. It reflects the company's ability to generate cash for investors and to finance growth or pay dividends. To determine the cash flow from assets for Precision Manufacturing in 2010, we need to analyze its operating cash flow, net capital spending, and changes in net working capital.
Step 1: Calculate Operating Cash Flow (OCF)
Operating cash flow represents the cash generated from core operations. It can be estimated using the following formula:
\[ \text{OCF} = EBIT + \text{Depreciation} - \text{Taxes} \]
Where:
- EBIT = Earnings Before Interest and Taxes
- Taxes = EBIT × Tax rate
First, we find EBIT:
\[
\text{EBIT} = \text{Sales} - \text{Cost of Goods Sold} - \text{Operating Expenses (Depreciation)}
\]
Given:
- Sales = $38,900
- Cost of Goods Sold = $24,600
- Depreciation = $1,700
Therefore:
\[
\text{EBIT} = 38,900 - 24,600 - 1,700 = 12,600
\]
Next, calculate taxes:
\[
\text{Taxes} = 12,600 \times 0.34 = 4,284
\]
Now, determine net EBIT after taxes:
\[
\text{EBIT} - \text{Taxes} = 12,600 - 4,284 = 8,316
\]
Add back depreciation (non-cash expense):
\[
\text{OCF} = 8,316 + 1,700 = 10,016
\]
Step 2: Calculate Net Capital Spending (NCS)
Net capital spending is the net investment in fixed assets:
\[
\text{NCS} = \text{Ending Net Fixed Assets} - \text{Beginning Net Fixed Assets} + \text{Depreciation}
\]
Given:
- Beginning net fixed assets = $14,300
- Ending net fixed assets = $13,900
- Depreciation = $1,700
Thus:
\[
\text{NCS} = 13,900 - 14,300 + 1,700 = 3,300
\]
Step 3: Calculate Change in Net Working Capital (NWC)
Net Working Capital (NWC) is Current Assets minus Current Liabilities.
At the beginning:
\[
\text{NWC}_\text{begin} = 8,700 - 6,600 = 2,100
\]
At the end:
\[
\text{NWC}_\text{end} = 9,200 - 7,400 = 1,800
\]
Change in NWC:
\[
\Delta \text{NWC} = \text{NWC}_\text{end} - \text{NWC}_\text{begin} = 1,800 - 2,100 = -300
\]
A negative change indicates a decrease in net working capital, which adds to cash flow.
Step 4: Calculate Cash Flow from Assets
Using the relation:
\[
\text{Cash Flow from Assets} = \text{Operating Cash Flow} - \text{Net Capital Spending} - \text{Change in NWC}
\]
Plugging in the numbers:
\[
= 10,016 - 3,300 - (-300) = 10,016 - 3,300 + 300 = 7,016
\]
Final Answer:
The cash flow from assets for Precision Manufacturing in 2010 is $7,016.
This figure represents the cash generated by the company's operations, after reinvestment in fixed assets and changes in net working capital, available for debt repayment, dividends, or expansion investments.
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