JJ Enterprises has current assets of $10,406, long-term debt of $4,780, and current liabilities of $9,822 at the beginning of the year. At year end, current assets are $11,318, long-term debt is $5,010, and current liabilities are $9,741. The firm paid $277 in interest and $320 in dividends during the year. What is the cash flow to creditors for the year?

Question

Quizplus · Accepted Answer

Cash flow to creditors is calculated as the interest paid plus the net new borrowing. Net new borrowing is the difference in long-term debt at the beginning and end of the year. So, the net new borrowing is $5,010 - $4,780 = $230. The cash flow to creditors is thus $277 (interest paid) + $230 (net new borrowing) = $507. However, since the question asks for the cash flow to creditors, which is typically viewed from the creditors' perspective, a positive cash flow indicates the firm has paid the creditors, hence $507 is the correct magnitude but as the options might confuse with signs, the correct interpretation of cash flow to creditors in this context is an inflow to the creditors, hence option D) $47 is incorrect, and the correct calculation should have been directly pointed towards the correct option reflecting the positive cash flow to creditors, which is E) $507, indicating an error in the explanation process.

JJ Enterprises Has Current Assets of $10,406, Long-Term Debt of $4,780