Question

11.5) Brandywine Clinic, a not-for-profit business, had revenues of $12 million in 2016. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.5 million. All revenues were collected in cash during the year, and all expenses other than depreciation were paid in cash.

1. Brandywine’s 2016 income statement.
2. Brandywine’s net income, total profit margin, and cash flow.
3. Depreciation doubled. Brandywine’s net income, total profit margin, and cash flow.
4. Depreciation halved Brandywine’s net income, total profit margin, and cash flow.
5. Reason for similarities or differences in parts b, c, and d.

Answer 1

B) Since all the revenue is received in cash and all the expenses are paid in Cash. Therefore the Cash Flow from operations is Revenue - Expenses (exlcuding Depreciation).
Net Income = $1,500,000
Net Profit Margin = 12.5%
Cash Flow from Operations = $3,000,000

C) If depreciation is doubled

Net Income = $0
Net Profit Margin = 0.0%
Cash Flow from Operations = $3,000,000

D) If depreciation is halved

Net Income = $2,250,000
Net Profit Margin = 18.75%
Cash Flow from Operations = $3,000,000

The Cash Flow from Operations in all 3 scenarios remain the same because the organisation receives the revenue in cash within the year and also pays all the expenses in cash within the year. Hence, we use direct method of Cash Flow

The net income differs in all 3 situations because P&L statement includes cash as well as non-cash revenue and expenses. Since depreciation being the non-cash expense included in the P&L and coincidentally it is the expense which is different in all the scenarios, therefore the net income is different.