Question

During 2018, Raines Umbrella Corp. had sales of $705,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $445,000, $95,000, and $140,000, respectively. In addition, the company had an interest expense of $70,000 and a tax rate of 25 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.) a. What is the company's net income (loss) for 2018? (Do not round intermediate calculations and enter your answer as a positive value.) b. What is the company's operating cash flow? (Do not round intermediate calculations.)

Answer 1

Answer:

See below.

Explanation:

We can compute this by making an income statement extract,

Sales                                              705,000

Less:

Cost of goods sold                       (445,000)

Gross profit                                    260,000

Less: expenses      

Admin and selling                           (95,000)

Depreciation                                    (140,000)

Profit Before interest and tax         25,000

Interest expense                              70,000

Profit/Loss after interest                 (45,000)

Since the Umbrella Corp is running losses, there is no taxable income.

Operating cash flow can be calculated by adjusting net income or losses for the depreciation expense and increases and decreases in the current assets. Since we do not have information about the current assets,

we estimate operating cash floes as,

Operating cash flows = -45,000 + 140,000 = $95,000

where 140 k is the depreciation adjustment.

Hope that helps.