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