Question

A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors

Answer 1

Answer:

The answer is -$4,940

Explanation:

Net income = Profit before interest and tax minus interest minus taxes

We rewrite the formula to get interest:

Interest = Profit before interest and tax minus taxes minus net income

= $27,130 - $5,450 - $16,220

=$5,460

Cash flow to creditor equals:

Amount repaid to suppliers minus new amount borrowed plus interest

$31,600 - $42,000 + $5,460

-$4,940

Answer 2

Answer:

Amount of cash flow to creditor is $37,060.

Net cash flow from/(to) creditors is $4,940

Explanation:

The amount of cash flow to credit is the net of the cash received from the creditor, interest paid to the creditor and amount paid as debt settlement.

The net income is the difference between the earnings before interest and taxes and the sum of interest and tax expenses. Mathematically,

Net income = Earnings before interest and tax - Interest - taxes

As such,

Interest = Earnings before interest and tax - net income - taxes

Interest = $27,130 - $16,220 - $5,450 = $5,460

Cash flow to creditor = $5,460 + $31,600

= $37,060

Net cash flow from/(to) creditors = $42,000 - $37,060 = $4,940