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A firm has gathered the following data for its current year's operations
A firm has gathered the following data for its current year's operations.The firm has only one asset, which has a 3-year recovery period. The cost of the asset a year ago was $165000. The depreciation rate is 45%
Accruals - $12500
Current assets - 135,000
Interest expense - 13,550
sales revenue- 420,000
inventory- 82,300
Total costs before depreciation,interest, and taxes - 295,000
tax rate on ordinary income - 40%
a. Calculate the firm's operating cash flow for the current year
b. why is it important to add back noncash items such as depreciation when calculating cash flows?
Expert Solution
| Income Statement | |||||
| Working | Amount | ||||
| Sales | 420,000 | ||||
| Total costs | -295,000 | ||||
| Gross Profit | 125,000 | ||||
| Depreciation | =45% of 165,000 | -74250 | |||
| EBIT | 50,750 | ||||
| Interest | -13,550 | ||||
| EBT | 37,200 | ||||
| Taxes | =40% of 37,200 | -14,880 | |||
| Net Income | 22,320 | ||||
| a) Operating Cash flow = Net Income + Depreciation | |||||
| Operating Cash flow = 22,320 + 74250 | |||||
| Operating Cash flow = 96,570 | |||||
| b) We always add non cash items such as depreciation or amortization in calculation of cash flows as these items does not result in outflow of cash. | |||||
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