Final answer:
The firm's 2018 operating cash flow (OCF) is calculated by adding the interest expense to the cash flow to creditors and adjusting for changes in net working capital and net capital spending, resulting in an OCF of $1,811,000.
Step-by-step explanation:
To calculate the firm's 2018 operating cash flow (OCF), we need to consider various components such as the interest expense, the change in long-term debt, the cash flow to creditors, and adjustments due to changes in net working capital and net capital spending.
We start by recognizing the firm's cash flow to creditors is the net amount of cash the firm paid its creditors over the year. It is calculated as interest paid minus the net new borrowing. The interest expense is given as $220,000, and the increase in long-term debt is calculated as the ending long-term debt minus the beginning long-term debt ($6.5 million - $6.3 million = $0.2 million).
Cash flow to creditors can be given by:
- Cash flow to creditors = Interest Expense - Increase in long-term debt
- Cash flow to creditors = $220,000 - $0.2 million
- Cash flow to creditors = $220,000 - $200,000
- Cash flow to creditors = $20,000
With this cash flow to creditors measured, we must add back the interest expense to find the operating cash flow:
- OCF = Cash flow to creditors + Interest Expense
- OCF = $20,000 + $220,000
- OCF = $240,000
However, we also need to adjust for changes in net working capital and net capital spending:
- OCF = $240,000 + Increase in NWC + Net capital spending
- OCF = $240,000 - ($-91,000) + $1,480,000
- OCF = $1,811,000
The final OCF for Kerber's Tennis Shop, Inc. for the year 2018 is $1,811,000.