Question

During 2018, Raines Umbrella Corp. had sales of $718,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $447,000, $95,500, and $141,000, respectively. In addition, the company had an interest expense of $70,800 and a tax rate of 22 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully tax deductible.)

  

a.	What is the company’s net income/loss for 2018? (Do not round intermediate calculations. Enter your answer as a positive value.)
b.	What is the company's operating cash flow? (Do not round intermediate calculations.)

Answer 1

Solution:
Calculation of Net Profit/Loss for 2018:
Sales                                                               (A)		$7,18,000
Less:Expenses
Cost of Goods sold		$4,47,000
Administrative and selling expenses		$95,500
Depreciation expense		$1,41,000
Total Expenses                                            (B)		$6,83,500
Earnings Before Interest and Tax   (A-B)		$34,500
Less: Interest Expense		-$70,800
Taxable Income		-$36,300
Less taxes		$0
Net Loss		-$36,300
a)
As there is a loss in earnings after interest ,taxes would not be paid , as taxes are paid on income
Therefore Net Loss = $36300
b)
Calculation of Operating Cash flow
Operating Cash flow = EBIT +Depreciation -Taxes
$34500 + $141000 -0
$175,500
Operating cash flow = $175,500
(We need cash Operating cash profit after tax)
Operating cash flow is cash flow generated from doing business activities i.s sale ,purchase, expenses etc. Interest is
not an operating activity , therefore we have consider interest before earnings and taxes , Depreciation is a non
cash expense , therefore added back , Taxes are operating expense, therefore to be substracted.