Question

During the year, the Senbet Discount Tire Company had gross sales of $1.11 million. The company’s cost of goods sold and selling expenses were $580,000 and $233,000, respectively. The company also had notes payable of $720,000. These notes carried an interest rate of 4 percent. Depreciation was $110,000. The tax rate was 25 percent.

a.	What was the company’s net income? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

b.	What was the company’s operating cash flow? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

   

Answer 1

a) Company's net income is $ 118,650

Working:

Net Income can calculate using:

Net Income = Pretax income - tax

Pretax Income = Gross sales - Cost of goods sold - selling expense - Intrest expense - Depreciation

Tax = Pretax income X Tax rate

Now

Pretax Income = 1110000 - 580,000 - 233,000 - 4% of 720,000 - 110,000

Pretax Income = 1110000 - 580,000 - 233,000 - 28,800 - 110,000

Pretax Income = $ 158,200

Tax = Pretax Income X Tax rate

Tax = 158,200 X 25%

Tax = 39,550

Thus Net Income = 158,200 - 39,550 = $ 118,650

b) Company’s operating cash flow is $129,650

Working:

Operating cash flow can be calculated using,

Operating cashflow = Net Income + Non cash expense

Here, Depreciation is the only noncash expense.

Thus,

Operating cashflow = Net Income + Depreciation

Substituting the values

Operating cashflow = $ 118,650 + $ 110,000 = $129,650