Question

The owner of a bicycle repair shop forecasts revenues of $168,000 a year. Variable costs will be $52,000, and rental costs for the shop are $32,000 a year. Depreciation on the repair tools will be $12,000.

a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%.

b. Calculate the operating cash flow for the repair shop using the three methods given below:

Now calculate the operating cash flow.

1. Dollars in minus dollars out.
2. Adjusted accounting profits.
3. Add back depreciation tax shield.

Answer 1

Answer to Part-a

The Income statement is shown below

Income Statement Revenues less:- variable costs less:- rental costs less:- Depreciation Expenses Net income before taxes Less:- Taxes @ 20% Net Income 168,000 52,000 32,000 12,000 72,000 14,400 57,600

Answer to Part-b

Using Dollars in minus Dollars Out approach

Operating Cash Flow - Dollar in Dollar Out Flow Cash Inflow Revenues $ 168,000 Cash Outflow Variable Costs 52,000 Rental Costs $ 32,000 Taxes $ 14,400 Operating Cash Flow 69,600

Using Adjusted Profit approach

Operating Cash Flow - Adjusted Accounting Profit Revenues 168,000 less:- variable costs 52,000 less:- rental costs 32,000 less:- Depreciation Expenses 12,000 Net income before taxes 72,000 Less:- Taxes @ 20% 14,400 Net Income 57,600 Add:- Depreciation 12,000 Operating Cash Flow 69,600

Using add back depreciation tax shield approach

Operating Cash Flow - Depreciation Tax Shield Revenues 168,000 less:- variable costs 52,000 less:- rental costs IS 32,000 Net income before taxes 84,000 Less:- Taxes @ 20% 16,800 Net Income 67,200 Add:- Depreciation tax shield (12000*20%) $ 2,400 Operating Cash Flow 69,600