Question

During the year, Belyk Paving Co. had sales of $2,275,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,285,000, $535,000, and $420,000, respectively. In addition, the company had an interest expense of $245,000 and a tax rate of 21 percent. (Ignore any tax loss carryforward provision and assume interest expense is fully deductible.)
a. What is the company’s net income?
b. What is its operating cash flow?
c. Explain your results in parts (a) and (b)

Answer 1

Answer:

a. -$210,000

b. $455,000

Explanation:

a. Company's net income

Sales. 2,275,000

Less:

Cost of goods sold

1,285,000

Administrative and selling expenses

535,000

Depreciation expense

420,000

EBIT

35,000

Less interest

245,000

Taxable income

-$210,000

Taxes 21%

Nil

Net income

-$210,000

b. The operating cash flow for the year

OCF = EBIT + depreciation - taxes

OCF = 35,000 + 420,000 - 0

OCF = $455,000

c. Net income was negative due to the deductibility of interest expense and depreciation.

The actual operating cash flow was positive due to the fact that depreciation is a non cash expense, and also interest is a financing and not an operating expense.