The owner of a bicycle repair shop forecasts revenues of $224,000 a year. Variable costs will...

The owner of a bicycle repair shop forecasts revenues of $224,000 a year. Variable costs will be $66,000, and rental costs for the shop are $46,000 a year. Depreciation on the repair tools will be $26,000. Prepare an income statement for the shop based on these estimates. The tax rate is 40%. Calculate operating cash flow for the year by using all three methods: (a) Dollars in minus dollars out; (b) Adjusted accounting profits; and (c) Add back depreciation tax shield.

Solutions

Expert Solution

FORECSATED REVENUES $224000

VARIABLE COSTS $ 66000

RENTAL COSTS $ 46000

DEPRECIATION $ 26000

INCOME BEFORE TAX $ 86000

TAX (40%) $ 34400

NET INCOME AFTER TAX $ 51600

1. OPERATING CASH FLOW USING DOLLARS IN MINUS DOLLARS OUT METHOD

REVENUES – CASH EXPENSES – TAXES

$224000 - $66000 - $46000 – $34400 = $77600

2. OPERATING CASH FLOW USING ADJUSTED ACCOUNTING PROFIT METHOD

NET INCOME AFTER TAX + DEPRECIATION = $51600 + 26000 = $77600

3. OPERATING CASH FLOW USING ADDBACK DEPRECIATION SHIELD METHOD

((REVENUES – CASH EXPENSES)((1 – t)) + TAX RATE X DEPRECIATION)

(($224000 - $66000 - $46000)(1-0.4)) + (0.40 X 26000)

= $67200 + $10400 = $77600

GO THORUGH. ABY DOUBTS, FEEL FREE TO ASK. GIVE POSITIVE FEEDBACK

jeff jeffy answered 1 year ago

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