Question

The Blossom Company has disclosed the following financial information in its annual reports for the period ending March 31, 2017: sales of $1.4 million, cost of goods sold of $800,000, depreciation expenses of $175,000, and interest expenses of $89,575. Assume that the firm has an average tax rate of 35 percent. Compute the cash flows to investors from operating activity.

Answer 1

cash flows from operating activity = Net income + non-cash expenses-increase in working capital

Step 1 : Net income

Sales		1,400,000
Less:	Cost of goods sold	800,000
Gross profit		600,000
Less:	Depreciation	175,000
EBIT		425,000
Less:	Interest	89,575
Income Before Income Tax (EBT)		335,425
Less: Income Tax@35%		117,399
Net Income		218,026

In this case depreciation is the only non cash expense and no details about working capital ie;current assets and current liabilities are provided. So we can take WC change as nil.

cash flows from operating activity = Net income + non-cash expenses-increase in working capital

= 218026+175000-0

= 393026