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During the year, the Russel Discount Tire Company had gross sales of $1.2 million. The firm’s...

During the year, the Russel Discount Tire Company had gross sales of $1.2 million. The firm’s cost of goods sold and selling expenses were $450,000 and $225,000, respectively. Russel also had notes payable of $900,000. These notes carried an interest rate of 9 percent. Depreciation was $110,000. Russel's tax rate was 35 percent. 1. What was Russel's net income? 2. What was Russel’s operating cash flow?

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Answer #1

1.

Income Statement

Sales $1,200,000
Cost of goods sold ($450,000)
Selling costs ($225,000)
Depreciation ($110,000)
EBIT $415,000
Interest($900,000 * 9%) ($81,000)
Taxable income $334,000
Taxes (35%) ($116,900)
Net income $217,100

2. OCF = EBIT + Depreciation – Taxes

OCF = $415,000 + $110,000 – $116,900 = $408,100

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