Question

During 2015, Rainbow Umbrella Corp. had sales of $720,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $500,000, $90,000, and $85,000, respectively. In addition, the company had an interest expense of $90,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.)

What is the company's net income for 2015?

What is it's operating cash flow?

Answer 1

The company's net income for 2015 is computed as shown below:

The profit before tax is computed as shown below:

= Sales - cost of goods sold - administrative and selling expenses - depreciation expenses - interest expenses

= $ 720,000 - $ 500,000 - $ 90,000 - $ 85,000 - $ 90,000

= - $ 45,000

Since the profit before tax is negative, hence there will be no tax expenses

The operating cash flow is computed as shown below:

= Earnings before interest and tax + Depreciation - tax expenses

= ( Sales - cost of goods sold - administrative and selling expenses - depreciation expenses ) + Depreciation

= ( $ 720,000 - $ 500,000 - $ 90,000 - $ 85,000 ) + $ 85,000

= $ 130,000

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