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:

What are earnings before interest and taxes?

To find this figure, we substract the cost of goods sold, general and administrative expenses, and depreciaction expense from the total sales:

Earnings Before Interest and Taxes (EBIT) = $10,000 - $6,500 - $1,000 - $1,000 = $1,500

What is net income?

To find the net income, we take the EBIT we found above, and substract from it the interest expense, which gives us the taxable income:

Taxable Income = $1,500 - $500

                           = $1,000

Now that we have the taxable income, we multiply this figure by the tax rate, to obtain the tax expense.

Tax expense = $1,000 x 35%

                      = $350

Finally, our net income is equal to the taxable income minus the tax expense:

Net Income = $1,000 - $350

                    = $650

What is cash flow from operations?

We add the non-cash expenses to net income to find this figure. In this case, we only have one non-cash expense: depreciation expense.

Cash flow from operations = $650 + $1,000

                                              = $1,650