Consider the following simplified Statement of Comprehensive Income and Statement of Financial Position from Smith

Question

Consider the following simplified Statement of Comprehensive Income and Statement of Financial Position from Smith Corporation’s 2018 Annual Report to Shareholders. Smith Corporation Statement of Comprehensive Income ($ millions) Net sales $8,324 Cost of goods sold $4,988 Depreciation $1,190 Earnings before interest and taxes $2,146 Interest paid $320 Taxable income $1,826 Taxes $621 Net income $1,205 Smith Corporation Statement of Financial Position 2017 & 2018 ($ millions) 2017 2018 2017 2018 Cash $5,415 $3,341 Accounts Payable 1,110 1,650 Accounts rec. $2,460 $979 Notes Payable 2,500 1,900 Inventory $2,405 $2,885 Total 3,610 3,550 Total 10,280 7,205 Long-Term debt 4,800 4,600 Net fixed assets 12,300 16,720 Common Stock 5,100 5,900 Retained earnings 9,070 9,875 Total assets 22,580 23,925 Total liabilities and Owner’s equity 22,580 23,925 d. Calculate cash-flow from assets, cash-flow to debtholders, and cash-flow to equity holders. Does the cash-flow identity hold?

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Answer: Operating Cash Flow = EBIT + Depreciation - Taxes Operating Cash Flow = $2,146 + $1,190 - $621 Operating Cash Flow = $2,715 Net Capital Spending = Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation Net Capital Spending = $16,720 - $12,300 + $1,190 Net Capital Spending = $5,610 Change in Net Working Capital = Ending Net Working Capital – Beginning Net Working Capital Net Working Capital = Current Assets – Current Liabilities Ending Net Working Capital = $7,205 - $3,550 Ending Net Working Capital = $3,655 Beginning Net Working Capital = $10,280 - $3,610 Beginning Net Working Capital = $6,670 Change in Net Working Capital = $3,655 - $6,670 Change in Net Working Capital = -$3,015 Cash flow from assets = Operating Cash Flow - Net Capital Spending - Change in Net Working Capital Cash flow from assets = $2,715 - $5,610 – (-$3,015) Cash flow from assets = $120 Cash flow to debt holders = Interest Paid – Net New Borrowing Net New Borrowing = $4,600 - $4,800 Net New Borrowing = -$200 Cash flow to debt holders = $320 – (-$200) Cash flow to debt holders = $520 Cash Flow to Equity holders = Dividend paid – Net New Equity issued Net New Equity issued = $5,900 - $5,100 Net New Equity issued = $800 Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividend $9,875 = $9,070 + $1,205 – Dividend Dividend = $400 Cash Flow to Equity holders = $400 - $800 Cash Flow to Equity holders = -$400 Yes, Cash flow identity hold as Cash flow from asset is equal

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Consider the following simplified Statement of Comprehensive Income and Statement of Financial Position from Smith Corporation’s 2018 Annual Report to Shareholders

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Net sales	$8,324
Cost of goods sold	$4,988
Depreciation	$1,190
Earnings before interest and taxes	$2,146
Interest paid	$320
Taxable income	$1,826
Taxes	$621
Net income	$1,205

	2017	2018		2017	2018
Cash	$5,415	$3,341	Accounts Payable	1,110	1,650
Accounts rec.	$2,460	$979	Notes Payable	2,500	1,900
Inventory	$2,405	$2,885	Total	3,610	3,550
Total	10,280	7,205	Long-Term debt	4,800	4,600
Net fixed assets	12,300	16,720	Common Stock	5,100	5,900
			Retained earnings	9,070	9,875
Total assets	22,580	23,925	Total liabilities and Owner’s equity	22,580	23,925