Question

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?

Answer 1

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.

The New Loan will help in increasing the cash flows for the company by providing tax shield on Interest. Depreciation also helps in increasing the cash flows of the company by providing tax shield on depreciation

c. Determine the Operating Cash Flow for Clarksville Company. What accounts for the difference in the net income and the operating cash flow?

Operating cash Flows = Net Income + Depreciation

Operating cash Flows = 12675 + 8000

Operating cash Flows = $20675

The Depreciation accounts for the difference in the net income and operating cash flow because it is an non cash expense.

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