Question

The owner of a bicycle repair shop forecasts revenues of $232,000 a year. Variable costs will be $68,000, and rental costs for the shop are $48,000 a year. Depreciation on the repair tools will be $28,000.

INCOME STATEMENT Revenue Rental costs Variable costs Depreciation Pretax profit Taxes Net income S

a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%.

b. Calculate the operating cash flow for the repair shop using the three methods given below:

Now calculate the operating cash flow.

1. Dollars in minus dollars out.
2. Adjusted accounting profits.
3. Add back depreciation tax shield.

Answer 1

a Income PARTLCULARS Statement . Amount ($) 1 Amounta 232,000 Revenue Less Expenses Rental Cast Variable east Depriciation 48,000 68,000 28,000 Total expenses (144000) less Tax @ool (88000x20%) b Pere Tax profit 488,000 (17600) Wet income (after Pax 70,400 y Computation of operating cash flow unden in minus dollar out Dollars method - Revenue -eash expenses - maxes $ 232,000 - (48000 +68000) – $17600 - 232000 - 146000 - 15600 $98,400 (Arismen) i Computation of operating cash flow under Adjusted accounting profits Method: - Aften tax profit & non-cash expenses ante = 70400 + 28,000 2898,400 (Answen) Liis computation of openating cash flow under Add back depriciation tax shield -

- (Revenue- cash expenses) x (1-tax muk)+ (tax Rate * - depriciation) - 1232000 – 116000) x(1-0.20) +(0.20x28000) - (11600 x 0.80) + 8600 92800 + 5600 =$98400 - (Answen) wrote for each ease y Cash expenses a variable east + Rental eap E C68000 + 48000) = $116000 (Whariase expenses a Depriciation a $28000 Non-Cash Lany Pax Reete = 20% 20.20.