Question

Determine earnings before interest and taxes, net income, and also the cash flow from operations for the following firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 35%.

Answer 1

1) EBIT or Earnings before interest and tax is a company's net income before interest and taxes are deducted.

EBIT = Sales - Cost of goods sold - operating expenses (including depreciation)

EBIT = $500,000 - $300,000 - $20,000 - $20,000

EBIT = $160,000

2) Net Income - It is the company's total income left after deducting both interest and taxes.

Net Income = EBIT - Interest - Tax

EBT = $160,000 - $40,000 = $120,000

Tax @ 35% = 35% * $120,000 = $42,000

Net Income = $120,000 - $42,000

Net income = $78,000

3) Cash Flow from operations- It is the cash generated from the normal activities or operations of business.

Cash flow from operations= Net income + depreciation

= $78,000 + $20,000 = $98,000