The owner of a bicycle repair shop forecasts revenues of $232,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $232,000 a year. Variable costs will be $68,000, and rental costs for the shop are $48,000 a year. Depreciation on the repair tools will be $28,000. The tax rate is 35%.

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.

The owner of a bicycle repair shop forecasts revenues of $232,000 a year. Variable costs will be $68,000, and rental costs for the shop are $48,000 a year. Depreciation on the repair tools will be $28,000. The tax rate is 35%.

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.

METHOD OPERATING CASH FLOW Adjusted Accounting Profts $ Cash Inflow/Cash Outflow Analysis $ Depreciation Tax Shield Approach $

Explanation / Answer

Adjusted accounts profits:
Net income = (232000 - 68000 - 48000 - 28000) * (1-35%) = 57,200.00
OCF = Net income + Depreciation = 57,200 + 28000 = 85200

Cash inflow / outflow method:
Taxes = (232000 - 68000 - 48000 - 28000) * (35%) = 30800
OCF = Revenue - Costs - Rent - Tax = 232000 - 68000 - 48000 - 30800 = 85,200

Depreciation tax shield approach:
OCF = (Revenues cash expenses) × (1 tax rate) + (depreciation × tax rate)
OCF = (232000 - 68000 - 48000) * (1-35%) + 28000 * 35% = 85,200

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.