Question

The POP Corporation had sales of $60 million in 2016. Costs other than depreciation and amortization were 60 percent of sales, and depreciation and amortization expenses were $19.6 million. It had $120 million debt with 5 % annual interest. All sales revenues were collected in cash, and costs other than depreciation and amortization must be paid for during the year. The corporate tax rate is 35 percent.

a. Set up an income statement for the above information.

b. Compute the net cash flow in 2016, and explain the meaning of the final number you found from the computation.

Answer 1

(a)
	Income statement
Sales :					60000000
Less : Cost other than depreciation and amortization					-36000000
(60 % of sales)
EBITDA					24000000
Less : Interest (120 million debt * 5%)					-6000000
Less : Depreciation and amortization					-19600000
					_________
EBT					-1600000
Less : Tax @ 35%		(Note 1)			560000
					_________
EAT (Net loss)					-1,040,000
					_________
(b) Net cash flow in year 2016
Net loss for year 2016					-1040000
Add : Depreciation and amortization					19600000
					_________
Net Cash flows in year 2016					18560000
					_________
Net Cash flows in Year 2016 shall be $18,560,000 ($18.56 million). It is that amount of cash which is obtained from business activities. Although there is Net loss of $1,040,000, But depreciation and amortization are non cash items. There is no real cash outflow from depreciation. It is only relevant for tax and Net income or loss calculation. For calculation of net cash inflows it is added, so we can calculate cash that is realised from business.
Note 1 : There is loss, so tax benefit @ 35% shall be our cash inflow as well as asset. So considered for calculation of net loss.