Question

Net Income and OCT

During 2015, rainbow umbrella corp. had sales of$590,000 cost of goods sold, administrative and selling expenses and depreciation expenses were $455,000, $85,000 and $125,000, respectively. In addition, the company had an interest expense of $65,000 and a tax rate of 35% (ignore any tax loss carry back or carry forward provisions)

A. What is the company’s net income for 2015?

B. What is it’s operating cash flow?

C. Explain your result in (a) and (b)

Answer 1

A
Income Statement
Sales	590,000
Less:COGS	455,000
Administrative and selling expenses	85,000
depriciation	125,000
EBIT	-75,000
Interest	-65,000
Taxable Income	-140,000
Taxes (35%)	0
Net Income	-140,000
b
operating cash flow
OCF = EBIT + Depreciation – Taxes
-75000+125000-0
50,000
c
Net income is negative because of depriciation and taxes.Actual Cash flow from operations is positive i.e 50000 as depriciation is a non cash expense and taxes is a financing expense