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an earnings value for all equity holdings in Dunn Equipment of
$810,941.
In calculating net income, Mr. Frazier subtracted
depreciation, whereas in calculating net cash-flow Ms. Eggleston
subtracted actual capital expenditures. Depreciation does not
represent actual reductions in cash-flow, but merely reductions
for accounting or tax purposes; whereas capital expenditures are
actual outlays of available cash and thus actually reduce net
cash-flow. Second, in calculating net income Mr. Frazier added
the net of profit and loss from the sale of equipment, whereas in
calculating net cash-flow Ms. Eggleston added the proceeds from
the sale of capital assets. Net cash-flow includes all the
proceeds from the sale of assets; the entire proceeds are
available to the shareholders, not just the capital gain or loss
on such sale. In other words, although basis is relevant for
computing capital gain or loss for tax purposes, it is not
relevant for purposes of available cash-flow.
Although Ms. Eggleston correctly stated that the proper
earnings base was net cash-flow to equity, she failed to include
two necessary adjustments, one for long-term debt and another for
net working capital. Net working capital, or current assets
minus current liabilities, is the amount of cash and other liquid
assets needed to operate the business through one business cycle.
See generally Bardahl Manufacturing Co. v. Commissioner, T.C.
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