Question

The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000.

a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%.

1. Dollars in minus dollars out.
2. Adjusted accounting profits.
3. Add back depreciation tax shield.

b. Calculate the operating cash flow for the repair shop using the three methods given below:

1. Dollars in minus dollars out.
2. Adjusted accounting profits.
3. Add back depreciation tax shield.

Answer 1

Income Statement				Operating Income Statement
Particular	Amount	Amount		Particular	Amount	Amount
i. Dollars in minus dollars out.				i. Dollars in minus dollars out.
Revenue	$     160,000			Revenue	$ 160,000
Less:				Less:
Variable Cost	$        50,000			Variable Cost	$    50,000
Rental Costs	$        30,000			Rental Costs	$    30,000
Income		$ 80,000		Operating Income		$ 80,000
ii. Adjusted accounting profits.				ii. Adjusted accounting profits.
Revenue	$     160,000			Revenue	$ 160,000
Less:				Less:
Variable Cost	$        50,000			Variable Cost	$    50,000
Rental Costs	$        30,000			Rental Costs	$    30,000
Depreciation	$        10,000			Depreciation	$    10,000
Income		$ 70,000		Operating Income		$ 70,000
iii.Add back depreciation tax shield.				iii.Add back depreciation tax shield.
Revenue	$     160,000			Revenue	$ 160,000
Less:				Less:
Variable Cost	$        50,000			Variable Cost	$    50,000
Rental Costs	$        30,000			Rental Costs	$    30,000
Depreciation	$        10,000			Depreciation	$    10,000
Income	$        70,000			Income	$    70,000
Less : Tax @20%	$        14,000			Less : Tax @20%	$    14,000
Earning after Tax	$        56,000			Earning after Tax	$    56,000
Add : Depreciation	$        10,000			Add : Depreciation	$    10,000
Income		$ 66,000		Operating Income		$ 66,000