The owner of a bicycle repair shop forecasts revenues of $220,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $220,000 a year. Variable costs will be $65,000, and rental costs for the shop are $45,000 a year. Depreciation on the repair tools will be $25,000. The tax rate is 35%. Calculate operating cash flow for the year by using all three methods adjusted accounting profits, cash inflow/cash outflow analysis, and the depreciation tax shield approach Method Adjusted accounting profits Cash inflow/cash outflow analysis Depreciation tax shield approach Are the above answers equal? Yes No

Explanation / Answer

(a) Operating cash flows under:

Adjusted Accounting Profits = 220000 - 65000 - 45000 - 25000 - 85000*.35

= $55250

Cash Inflow / otflow analysis = 220000 - 65000 - 45000 - 85000*.35

=$80250

Depreciation tax shield approach = Taxable income -tax shield on depreciation

= 110000 - 8250 = $101750

Depreciation tax shield = 25000*.35 = 8750

(b) No. the operating cash flows are not same.

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