Question

Sheryl's Shipping had sales last year of $10,000. The cost of goods sold was $6,500, general and administrative expenses were $1,000, interest expenses were $500, and depreciation was $1,000. The firm's tax rate is 35%.
a. What are earnings before interest and taxes?
b. What is net income?
c. What is cash flow from operations?

Answer 1

Answer:

(a) $1,500

(b) $650

(c) $1,650

Explanation:

Given that,

Sales last year = $10,000

cost of goods sold = $6,500

General and administrative expenses = $1,000

Interest expenses = $500

Depreciation = $1,000

Firm's tax rate = 35%

(a) Gross Profit:

= Sales last year - cost of goods sold

= $10,000 - $6,500

= $3,500

Earning Before Interest and Taxes (EBIT):

= Gross Profit - General and administrative Expenses - Depreciation

= $3,500 - $1,000 - $1,000

= $1,500

Earning after interest before taxes:

= Earning Before Interest and Taxes (EBIT) - Interest expense

= $1,500 - $500

= $1,000

(b) Net income:

= Earning after interest before taxes - Taxes

= $1,000 - (0.35 × $1,000)

= $1,000 - $350

= $650

(c)Cash Flow From operation:

= Net Income + Non Cash Expenses(Depreciation)

= $650 + $1,000

= $1,650