The December 31, 2021, balance sheet of Chen, Incorporated, showed long-term debt of $1,375,000, $135,000 in the common stock account, and $2,600,000 in the additional paid-in surplus account. The December 31, 2022, balance sheet showed long-term debt of $1,530,000, $145,000 in the common stock account and $2,900,000 in the additional paid-in surplus account. The 2022 income statement showed an interest expense of $91,500 and the company paid out $140,000 in cash dividends during 2022. The firm’s net capital spending for 2022 was $910,000, and the firm reduced its net working capital investment by $120,000. What was the firm's 2022 operating cash flow, or OCF?

Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.



To calculate the firm's 2022 Operating Cash Flow (OCF), we will use the following key formula derived from the cash flow identity:

\[
\text{OCF} = \text{Net Income} + \text{Depreciation} + \text{Changes in Working Capital}
\]

However, the net income isn't directly provided, and we need to use the information given in the problem to work backward to calculate it. We'll follow these steps:

### Step 1: Calculate Net Income
To calculate the net income, we need the change in retained earnings. This change is calculated using the following relation:

\[
\text{Change in Retained Earnings} = \text{Net Income} - \text{Dividends Paid}
\]

Let's compute the change in retained earnings. The retained earnings at the beginning and end of the year can be calculated from the total equity, considering common stock and additional paid-in surplus:

- **Retained Earnings (2021):**
\[
\text{Total Equity in 2021} = \text{Common Stock (2021)} + \text{Additional Paid-In Surplus (2021)} = 135,000 + 2,600,000 = 2,735,000
\]
- **Retained Earnings (2022):**
\[
\text{Total Equity in 2022} = \text{Common Stock (2022)} + \text{Additional Paid-In Surplus (2022)} = 145,000 + 2,900,000 = 3,045,000
\]

Now calculate the change in retained earnings:
\[
\text{Change in Retained Earnings} = 3,045,000 - 2,735,000 = 310,000
\]

Using the relation for change in retained earnings:
\[
310,000 = \text{Net Income} - 140,000
\]

So, the net income is:
\[
\text{Net Income} = 310,000 + 140,000 = 450,000
\]

### Step 2: Calculate Operating Cash Flow (OCF)
Now, we'll use the given data to calculate OCF using the cash flow identity. The net income is $450,000. Since no depreciation information is directly provided, we'll assume it's embedded in the capital spending. The reduction in net working capital (NWC) is $120,000 (a reduction means an increase in cash flow).

So, the formula for OCF becomes:
\[
\text{OCF} = \text{Net Income} + \text{Interest Expense} - \text{Changes in Working Capital}
\]
\[
\text{OCF} = 450,000 + 91,500 + 120,000
\]

Finally, calculate OCF:
\[
\text{OCF} = 661,500
\]

Thus, the firm's **Operating Cash Flow (OCF)** for 2022 is **$661,500**.

Would you like to dive into any specific details or ask questions?

### Relative Questions:
1. How does reducing working capital affect the cash flow?
2. What would happen to OCF if there were depreciation provided?
3. How is net capital spending factored into cash flow calculations?
4. How do dividends affect retained earnings and net income calculations?
5. What other methods can be used to calculate operating cash flow?

**Tip:** Always double-check the impact of non-cash expenses (like depreciation) when calculating cash flow from net income.

The December 31, 2021, balance sheet of Chen, Incorporated, showed long-term debt of $1,375,000, $135,000 in the common stock account, and $2,600,000 in the additional paid-in surplus account. The December 31, 2022, balance sheet showed long-term debt of $1,530,000, $145,000 in the common stock account and $2,900,000 in the additional paid-in surplus account. The 2022 income statement showed an interest expense of $91,500 and the company paid out $140,000 in cash dividends during 2022. The firm’s net capital spending for 2022 was $910,000, and the firm reduced its net working capital investment by $120,000. What was the firm's 2022 operating cash flow, or OCF?

Learn how to calculate the 2022 Operating Cash Flow (OCF) for Chen, Incorporated. This financial problem covers key concepts like net income, changes in working capital, and interest expenses. Detailed formulas and calculations show how to derive the OCF of $661,500. Ideal for finance and accounting students.

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