Question

Your proforma income statement shows sales of $1,033,000, cost of goods sold as $503,000, depreciation expense of $103,000, and taxes of $170,800 due to a tax rate of 40%. What are your proforma earnings? What is your proforma free cash flow? Values Sales $1,033,000 Cost of goods sold Gross profit Depreciation EBIT Taxes(40%) Earnings

Answer 1

Answer:

Proforma Earnings:              $

Sales                             1,033,000

Cost of goods sold       (503,000)

Depreciation expense  (103,000)

Earnings before tax      427,000

[email protected]%                       (170,800)

Proforma earnings        256,200

Free Cashflow                   $

Proforma earnings         256,200

Add: Depreciation         103,000

Free cashflow                 359,200

Explanation:

Proforma earnings equal sales minus cost of goods sold minus depreciation minus tax.

Free cashflow is proforma earnings plus depreciation. Since depreciation does not involve movement of cash, it needs to be added back to the proforma earnings in order to obtain free cashflow.