Question

Suppose Edison Autos has an​ $11 million unexpected increase in cost of sales that is funded by an additional​ $11 million in accounts payable. Its tax rate on pretax income is​ 26%. The impact on its earnings will be ​$___. At the end of the​ year, the impact on its cash flow will be ​$___.

Answer 1

Additional cost of goods sold					11000000
Tax rate					26%
Tax shield on Cost of goods sold (11000000*26%)					2860000
Increase in cashflows by $ 2860000
(as no effect of increased cost of goods ssold as it is 100% financed through increase in Accounts payable)
Additional Cost of goods sold will decrease the net income:
Additional COGS				11000000
Less: tax @ 26%				2860000
Decrease in Net income				8140000