In: Finance
2. Clarksville Printing Company sold 1,500 finance books for $85 each to University of the West Indies (UWI) in 2019. These books cost Clarkesville $62 each to produce. In the marketing of the books, the Company paid $4,600 to a marketing firm, and it also borrowed $50,000 on January 1, 2019, on which the Company paid 10 percent interest. Both interest and principal are paid on December 21, 2019. Depreciation expense for the year was $8,000 and Clarksville’s tax rate is 25 percent. a. Verify whether Clarksville Printing Company made a profit in 2019, by presenting an income statement in good form. b. Explain the impact of the new loan of $50,000 and the depreciation expense on the cash flows. c. Determine the Operating Cash Flow for Clarksville Company. What accounts for the difference in the net income and the operating cash flow?
Note: The loan was borrowed on 1/1/2019 and repaid on 21/12/2019 i.e. borrowed for 354 days and hence the interest is calculated for 354 days and not 365 days
a) Net Income = $12,788.01
b) Depreciation is a non-cash expense that is used to reduce the
tax outflow and thus increasing the net income. Since it is a
non-cash expense, it is added back to the profit in order to
calculate the operating cash flow.
Since there is no cash outflow while reporting depreciation as an
expense. Therefore, it is added back to the net income in order to
ascertain the total cash flow from operations
New Loan
It will have no impact on Cash Flow from Financing Part because the
loan was repaid back.
On 1/1/2019 the amount ($50,000) was borrowed which would increase
the cash flow from financing activities. However, on 21/12/2019 the
amount was repaid (-$50,000) back and hence there would be no
effect on cash flow from financing.
c) Net Income = $12,788.01
Operating Cash Flow = Net Income + Depreciation
= $20,788.01
The difference between operating cash flow and net income is because of depreciation. Depreciation is a non-cash expense and hence it is added back to the net income.