The owner of a bicycle repair shop forecasts revenues of $164,000 a year. Variab

Question

The owner of a bicycle repair shop forecasts revenues of $164,000 a year. Variable costs will be $51,000, and rental costs for the shop are $31,000 a year. Depreciation on the repair tools will be $11,000. The tax rate is 40%.

a. 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.

b. Are the above answers equal?

Method Operating Cash Flow Adjusted accounting profits $ Cash inflow/cash outflow analysis Depreciation tax shield approach

Explanation / Answer

a)1)Adjusted accounting profits

operating cash flow=accounting profit+Depreciation

accounting profit

=(revenues-Variable costs-rental costs-Depreciation)*(1-TaxRate)

=(164,000-51,000-31,000-11000)*(1-40%)

=42600

accounting profit=42600

Thus, operating cash flow=42600+11000=$ 53600

2)Cash inflow/cash outflow analysis

operating cash flow=revenues-cash expenses as Variable costs and rental costs-Taxes

operating cash flow=164,000-51,000-31,000-Taxes

Taxes=(revenues-Variable costs-rental costs-Depreciation)*(TaxRate)

Taxes=(164,000-51,000-31,000-11000)*(40%)

Taxes=28400

operating cash flow=164,000-51,000-31,000-28400=$ 53600

3)Depreciation tax shield approach

operating cash flow=(revenues-cash expenses as Variable costs and rental costs)*(1-TaxRate)+TaxShield

operating cash flow=(revenues-cash expenses as Variable costs and rental costs)*(1-TaxRate)+Depreciation*TaxRate

operating cash flow=(164,000-51,000-31,000)*(1-.40)+11000*.40

operating cash flow=49200+4400

operating cash flow=$ 53600

b) Yes the above answers are equal.

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