Question

The Rogers Corporation has a gross profit of $784,000 and $314,000 in depreciation expense. The Evans Corporation also has $784,000 in gross profit, with $48,900 in depreciation expense. Selling and administrative expense is $200,000 for each company.
Given that the tax rate is 40 percent, compute the cash flow for both companies.

Answer 1

Answer:

$476,000 and $369,960

Explanation:

The computation of the cash flows is shown below:

The formula is

= EBIT + Depreciation - Income tax expense

where,  

EBIT = Gross profit - Selling and administrative expense  - depreciation expense

For Rogers company

= $784,000 - $200,000 - $314,000

= $270,000

where,

The income tax expense equal to

= (Gross profit - Selling and administrative expense  - depreciation expense ) × tax rate

= ($784,000 - $200,000 - $314,000) × 40%

= $108,000

So the cash flow is

= 270,000 + $314,000 - $108,000

= $476,000

For Evans company

= $784,000 - $200,000 - $48,900

= $535,100

where,

The income tax expense equal to

= (Gross profit - Selling and administrative expense  - depreciation expense ) × tax rate

= ($784,000 - $200,000 - $48,900) × 40%

= $214,040

So the cash flow is

= $535,100 + $48,900 - $214,040

= $369,960