Question

1. What are the two items that are part of accounting net income but not the operating cash flow (OCF)?

I) Depreciation

II) Interest expanse

III) Taxes

2. Refer back to previous question.

During 2017, company XYZ had sales 263658; costs 142213; depreciation expense 36358; interest expense 11698; tax rate 35 percent.

Calculate company XYZ operating cash flow.

3. Refer back to previous question.

During 2017, company XYZ had sales 263658; costs 142213; depreciation expense 36358; interest expense 11698; tax rate 35 percent.

If company XYZ had additions to retained earnings 7597 in 2017. What is the dividend payout ratio? Express your answer as %.

Answer 1

1) I. Depreciation , II. Interest expense

Net income is calculated by subtracting cost of sales, operating expenses, depreciation, amortization, Interest and taxes from the total revenue.

But depreciation as a non cash expense doesn't affect the operating cash flows of the business. And Interest expenses as part of financing activities do not form part of Operating cash flows.

2)

First let's prepare an income statement for the year 2017 as follows to find out the net income of company XYZ

PARTICULARS AMOUNT

Sales 2,63,658

Less: cost of sales (1,42,213)

Less: Depreciation (36,358)

Earnings Before Interest and Taxes 85,087

Less: Interest expenses (11,698)

Earnings Before Tax 73,389

Less: Tax (73,389 × 35%) (25,686.15)

Net income 47,702.85

It is already explained in the first part of the question that depreciation and Interest expenses shouldn't be considered for calculating Operating cash flows. Thus, depreciation and interest expenses should be add back to the net income.

Operating cash flows = Net income + Depreciation + Interest expenses

= 47,702.85 + 36,358 + 11,698

= 95,758.85

Operating cash flow of company XYZ is 95,758.85

Note : Operating cash flows can be simply calculated by deducting operating expenses (include tax) from the operating income.

3)

Dividend payout ratio = Dividends / Net income × 100

Dividends = Net income - Retained earnings

= 47,702.85 - 7,597

= 40,105.85

Net income = 47.702.85 (as computed in part 2)

Dividend payout ratio = 40,105.85 / 47,702.85 × 100

= 84.07%

Dividend payout ratio of company XYZ is 84.07%