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
Statement ($000) for the
Year Ended December 31,
2003

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