Question

The Sandhill Company has disclosed the following financial information in its annual reports for the period ending March 31, 2017: sales of $1.48 million, cost of goods sold of $810,000, depreciation expenses of $175,000, and interest expenses of $89,575. Assume that the firm has an average tax rate of 35 percent. Compute the cash flows to investors from operating activity. (Round answer to 2 decimal places, e.g. 15.25.)

Cash flow from operating activity $____________

Answer 1

The cash flow from operating activity is computed by using the below mentioned formula:

= EBIT + Depreciation - tax expenses

EBIT is computed as follows:

= Sales - cost of goods sold - depreciation expenses

= $ 1,480,000 - $ 810,000 - $ 175,000

= $ 495,000

Tax expenses is computed as follows:

= ( EBIT - interest expenses ) x tax rate

= ( $ 495,000 - $ 89,575 ) x 35%

= $ 141,898.75

So the operating cash flow will be:

= $ 495,000 + $ 175,000 - $ 141,898.75

= $ 528,101.25

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