The owner of a bicycle repair shop forecasts revenues of $224,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $224,000 a year. Variable costs will be $66,000, and rental costs for the shop are $46,000 a year. Depreciation on the repair tools will be $26,000. The tax rate is 40%.

Calculate operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach.

Calculate operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach.

Explanation / Answer

a. accounting profit =($224000-$66000-$26000)(1-0.4)=$79200

Adjusted accounting profits = $79200+$26000=$105200

b Cash inflow/cash outflow analysis =$224000-($66000+$26000+52800)=$105200

c Depreciation tax shield approach=$105200

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