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4. Last year Flying Tiger Inc. had operating revenues of $34.2 million. Its cost of goods...

4. Last year Flying Tiger Inc. had operating revenues of $34.2 million. Its cost of goods sold and selling expenses amounted to $31.4 million. Depreciation was $3.1 million. There are no income taxes and no interest expense. Assume that there was no change in working capital during the year. (a) What was Flying Tiger’s Net Income for the year? (b) What was Flying Tiger’s Operating Cash Flow for the year? Explain the intuition for the difference between income and operation cash flow in this case. (c) Suppose that, in contrast to the statement made above, Flying Tiger’s Net Working Capital (excluding cash) increased during the past year. Is its operating cash flow greater or less that what you computed in (b)? Explain why.

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Answer #1

Operating revenue = 34.2

COGS = 31.4

Gross Profit = 34.2 - 31.4 = 2.8

Depreciation = 3.1

EBIT = -0.3

Since no tax and interest is there

Net income = EBIT = -0.3

Operating cash flow = Net income + Non cash adjustments +/- change in working capital

Operating cash flow = -0.3 + 3.1 = 2.8

Working capital = Current assets - Current liabilities

Increase in net working capital means that either current assets has increased or current liability has decreased

So it means that there is cash outlow

So operating cash flow will decrease with increase in working capital

Let me know if you have any doubts

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