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6 September, 11:14

The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000. Prepare an income statement for the shop based on these estimates. The tax rate is 35%. Calculate operating cash flow for the year by using all three methods: (a) Dollars in minus dollars out; (b) Adjusted accounting profits; and (c) Add back depreciation tax shield. Operating Cash Flovw Method a. Dollars in minus dollars out b. Adjusted accounting profits c. Add back depreciation tax shield

Should all the above approaches result in the same value for cash flow.

a. Yes

b. No

+1
Answers (1)
  1. 6 September, 12:25
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    Answer and Explanation:

    Revenue $160,000

    Rental Costs $30,000

    Variable Costs $50,000

    Depreciation $10,000

    Profit before tax $70,000

    Tax (35%) $24,500

    Net Income $45,500

    Operating cash flow

    a) Dollars in minus dollars out

    Revenue? rental costs? variable costs? taxes = $160000 - $30000-$50000-$24,500 = $55,500

    b) Adjusted accounting profits

    Operating cash flow = Net income + depreciation = $45,500 + $10,000 = $55,500

    c) Add back depreciation tax shield

    Operating cash flow = [ (Revenue? rental costs? variable costs) * (1? 0.35) ] + (depreciation * 0.35) ]

    = ($160,000-$30000-$50,000) * 0.65 + $10,000*0.35 = $55,500

    Yes, the above approaches result in the same value for cash flow
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