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Originally Posted by IckUber
i'm taking an independent study finance course and i am confused about one of my quiz questions. the question reads:
If cash flow from operations is $938, net capital spending is -$211, and net working capital declines by $73, what is cash flow from assets?
a. $654
b. $800
c. $954
d. $1,076
e. $1,222
I know that cash flow from assets is the operating cash flow minus the capital spending, minus the change in net working capital. My question is, since the net capital spending is a negative number, do I subtract the negative ( by adding it)? Also, does it matter that the net working capital declined instead of increased? Do I treat this as a negative number or just the quantity of "73" because it asked for the CHANGE? Help! My guess is D, but I'm not sure at all. Someone please explain.  |
Cash flow from operations includes:
Net income (loss)
+depreciation
+loss on sale from assets/-gain on sale of assets
+(decreases in most current asset accounts)
-(increase in most current asset accounts)
+(increases in most current liability accounts)
-(decreases in most current liability accounts)
Net capital spending, while never having heard that particular term, would be assumed to be net cash spent on fixed assets (capital). What this means in this problem is you took a current asset (cash) and converted it into a non-current asset (fixed assets).
Working capital is current assets less current liabilities.
So.....Net working capital declines 73, so let's add back the purchase of assets to come to a positive $138, which should be the rest of the change in your current assets. Subtract that from your total change in operating cash flow of $938, I'd venture the answer should be b, $800.