A sports game company with current sales of $400,000 does not expect any growth in sales for the next two years. The company, however, anticipates that expenses, currently at $200,000, will increase to $210,000 next year and to $220,500 the year after. Assuming a tax rate of 34%, determine the firm's cash flow in year two. Assume annual depreciation is $20,000. A. $112,360B. $125,270C. $145,890D. $178,330

Answer is B

Explanation:

Cash flow = Net Income + Adjustment for Non-Cash expenses

So we must first calculate the Net Income for the second year using the Profit and Loss Statement format:

Year 2

Revenue $400,000

Less Expenses ($220,500)

Less Depreciation ($ 20,000)

Profit before Tax $159,500

Less Tax ($54,230) {34% of Profit before Tax}

Net Income $105,270

Add Depreciation $20,000

Cashflow $125, 270

{Remember Depreciation is a non cash expense, so we must add it to the Net income to arrive at the cash flow}

(Remember the company expects no change in revenue)