1. BlackBox Co. had sale $10000 last year. The cost of goods sold was $6500, general...
1. BlackBox Co. had sale $10000 last year. The cost of goods sold was $6500, general and administrative expenses were $1000, interest expenses were $500, and depreciation was $1000. The firm’s tax rate is 35%. Please calculate EBIT, Net Income and Cash flow from operation. [Hint: cash flow from operation is equal to net income plus depreciation expense because it is a non-cash expense and should be added back when calculating cash flow.]
2. During the last year of operation, account receivable increased by $10000, account payable decreased by $7000, and inventories decreased by $2000. What is the total impact of these changes on the difference between profit and cash flow?
3. Cisco Co. sells $1 billion marketable securities and use the money to buy inventories. What will happen to this firm’s current ratio? How about its quick ratio?
Homework Answers
1: a: EBIT = Sales – COGS- Selling and Administrative expenses-Depreciation
= 10000-6500-1000-1000
= $1500
B: Net Income = (EBIT- Interest)*(1-Tax)
= (1500-500)*(1-0.35)
=650
C: Cash flow from operation = Net Income+Depreciation
= 650+1000
=1650
2: There is no impact. The difference between profit and cash flow is due to depreciation which is not impacted by these variables.
3: Current ratio remains the same since current assets remain the same. Quick ratio will decline because quick assets are reduced.
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