Question

Harris Supply has sales of Sales of $230, Cost of Goods Sold of $78, Depreciation of $40 and Interest Expense of $12. If their tax rate is 35%, what is the net income and operating cash flow?

Answer 1

Answer:

cash provided by operating activities 105

Explanation:

We will use the indirect method.

First, we calculate the net income.

sales                    230

COGS                   (78)

depreciation        (40)

interest expense  (12)

EBT                       100

tax rate 35%

tax expense          (35)

net income             65

Now, we adjust the income by removing the non-monetary term

cash flow from operating activities:

net income                     65

adjustment to net income

non-monetary term

depreciation expense    40 (A)

adjusted net income           105

cash provided by operating activities 105

Notes:

(A) The depreciation expense is an acconting metric, it is used in accounting it does not represent a cash outflow, so it is removed from their effect on net income