The above approaches result in the same value for cash flow
Revenue $160,000
Rental Costs $30,000
Variable Costs $50,000
Depreciation $10,000
Profit before tax $70,000
Tax(35%) $24,500
Net Income $45,500
a) Dollars in minus dollars out
= Revenue - Rental costs - Variable costs - Taxes
= 1,60,000 - 30,000 - 50,000 - 24,500
$55,500
b) Adjusted accounting profits
Operating cash flow = Net income + depreciation
= 45,500 + 10,000
= $55,500
c) Add back depreciation tax shield
Operating cash flow
= [(Revenue - rental costs - variable costs) × (1 - rate of Dep)] + (depreciation × rate of dep]
= ( 160,000- 30000- 50,000) × 0.65 + 10,000 × 0.35
= 55,500
Complete Question -
The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000. Prepare an income statement for the shop based on these estimates. The tax rate is 35%. Calculate operating cash flow for the year by using all three methods: (a) Dollars in minus dollars out; (b) Adjusted accounting profits; and (c) Add back depreciation tax shield. Operating Cash Flow Method a. Dollars in minus dollars out b. Adjusted accounting profits c. Add back depreciation tax shield
Should all the above approaches result in the same value for cash flow.
a. Yes
b. No
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