The owner of a bicycle repair shop forecasts revenues of $208,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $208,000 a year. Variable costs will be $62,000, and rental costs for the shop are $42,000 a year. Depreciation on the repair tools will be $22,000. The tax rate is 30%.

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 $208,000 a year. Variable costs will be $62,000, and rental costs for the shop are $42,000 a year. Depreciation on the repair tools will be $22,000. The tax rate is 30%.

Explanation / Answer

1)Profit before tax= revenues-Variable costs-rental costs

=$208000-62000-42000-22000

=$82000

Adjustment for depn=$22000

Hence Operating cash flow before tax=$104000

less:tax@30% =$31200

Hence cash flow as per adjustment of profit=$72800

2)Revenue=$208000

Less:VAriable cost=$62000

:Rent =$22000

Operating cash before Tax=$124000

less:tax@30%=$37200

Operating cash flow=$82800

3)Profit before tax= revenues-Variable costs-rental costs

=$208000-62000-42000

=$124000

Less tax@30%=37200

Operating cash flow=$82800

add:depreciation tax shield=$6600

actual Cash flow from operations=$89400

No all are not same

Thanks

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