Question

Building an Income Statement. During the year, the Senbet Discount Tire Company had gross sales of $925,000. The firm's cost of goods sold and selling expenses were $490,000 and $220,000, respectively. Senbet also had notes payable of $740,000. These notes carried an interest rate of 4 percent. Depreciation was $120,000. Senbet's tax rate was 35 percent.

a. What was Senbet's net income?

b. What was Senbet's operating cash flow?

Please provide the following for each in the tan box:

Sales

Cost of goods sold

Selling expenses

Notes payable

Interest rate

Depreciation expense

Tax rate

Answer 1

a)	Particulars	$
	Sales	925,000
	Less: Cost of goods sold	490,000
	Gross Profit	435,000
	Less: Selling expenses	220,000
	EBITDA	215,000
	Less: Depreciation	120,000
	EBIT	95,000
	Less: Interest expense	29,600
	EBT	65,400
	Less: Taxes at 35%	22,890
	Net Income	42,510

b)	Particulars	$
	Net income	42,510
	Add back depreciation	120,000
	Add back Interest expense	29,600
	Operating cash flow	192,110

Note:
1) We add back depreciation because it is a non-cash expense.
2) We add back interest expense because it is cash flow from financing activity.
3) EBITDA = Earnings Before, Interest, Taxes, Depreciation and Amortization.

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