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Depreciation and accounting cash flow A firm has gathered the following data for its current year's operations

Finance

Depreciation and accounting cash flow 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?

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Solution

A.  

Sales $        420,000
Add: Accrued Income but not received $          12,500
Less: Total costs before depreciation, interest and taxes $        295,000
EBITD $        137,500
Less: Depreciation on 165000 @ 45% $          74,250
EBIT $          63,250
Less: Interest $          13,550
EBT $          49,700
Less: Tax @ 40% $          19,880
Earning after tax $          29,820
Add: Depreciation $          74,250
Less: Non Cash Income (Accured) $        (12,500)
Operating Cash Inflows $          61,750

B.It is important to add back non cash expense such as depreciation and less non cash income because when we are finding cash flows then only cash items are taken in to consideration. But for the calculation of profit we have to take both cash and non cash items in to consideration after that we have to adjust non cash items to reach to the cash flows.