Question

Depreciation and accounting cash flow   A firm in the third year of depreciating its only​ asset, which originally cost $ 184,000 and has a​ 5-year MACRS recovery period has gathered the following data relative to the current​ year's operations: Accruals $ 15,800 Current assets 113,000 Interest expense 14,500 Sales revenue 402,000 Inventory 69,900 Total costs before​ depreciation, interest and taxes 291,000 Tax rate on ordinary income 21 %

a. Use the relevant data to determine the operating cash flow for the current year.

b. Explain the impact that​ depreciation, as well as any other noncash​ charges, has on a​ firm's cash flows.

Answer 1

a.
The 5 year MACRS depreciation rate for 3rd year is 19%
Therefore depreciation on asset = 184000*19%
Depreciation on asset	$34,960
Calculation of operating cash flow
Sales revenue	$402,000
Less: Total costs before depreciation, interest and taxes	$291,000
Depreciation expense	$34,960
Earnings before interest and taxes	$76,040
Less: Taxes @ 40%	$30,416	76040*40%
Net operating profit after taxes	$45,624
Plus: Depreciation	$34,960
Operating cash flow	$80,584
The interest expense is cash outflow from financing activity and therefore not considered for calculating operating cash flow.
b.
Depreciation and other non cash expenses do not involve cash outflow and therefore they are added to net income to calculate the operating cash flow.
Thus, depreciation and other non cash expenses do not impact firm's cash flows.