Substituting the values for Baker Corporation from its income statement (Table 3.4) into Equation 3.2, we get
OCF=$370 $120+ $100=$350
Baker Corporation during 2003 generated $350,000 of cash flow from producing and selling its output. Because Baker’s operating cash flow is positive, we can conclude that the firm’s operations are generating positive cash flows.
TABLE 3.4 |
|
Baker Corporation Income |
|
Sales revenue |
$1,700 |
Less: Cost of goods sold |
1,000 |
Gross profits |
$700 |
Less: Operating expenses |
|
Selling expense |
$70 |
General and administrative expense |
120 |
Lease expensea |
40 |
Depreciation expense |
100 |
Total operating expense |
330 |
Earnings before interest and taxes (EBIT) |
$370 |
Less: Interest expense |
70 |
Net profits before taxes |
$300 |
Less: Taxes (rate40%) |
120 |
Net profits after taxes |
$180 |
Less: Preferred stock dividends |
10 |
Earnings available for common stockholders |
$170 |
Earnings per share (EPS)b |
$1.70 |
Equation 3.2
OCF=EBIT Taxes+ Depreciation