The owner of a bicycle repair shop forecasts revenues of $212,000 a year. Variab
ID: 2750934 • Letter: T
Question
The owner of a bicycle repair shop forecasts revenues of $212,000 a year. Variable costs will be $63,000, and rental costs for the shop are $43,000 a year. Depreciation on the repair tools will be $23,000. 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.
The owner of a bicycle repair shop forecasts revenues of $212,000 a year. Variable costs will be $63,000, and rental costs for the shop are $43,000 a year. Depreciation on the repair tools will be $23,000. The tax rate is 40%.
Explanation / Answer
(a) adjusted accounting profits:-
Revenue 212000
Variable costs 63000
rent for shop 43000
Depreciation 23000
profot before tax 83000
less tax @ 40% 33200(83000*0.4)
profir after tax 49800
add depreciation 23000
cash flows after tax 72800 ( 23000+49800)
(b) cash inflow/cash outflow analysis ($)
cash inflow 212000
cash outflow:-
variable costs 63000
rent 43000
tax on profit 33200* 139200 *( (212000-63000-43000-23000)0.4)
cash flows 72800
(c) the depreciation tax shield approach:-
Revenue 212000
Variable costs 63000
rent for shop 43000
profit before tax & dep 106000
less tax @40% 42400 (106000*0.4)
profot after tax before dep 63600
add tax sheld on dep 9200 (23000*0.4)
cash flow from prerations 72800
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