Question

During the year, Belyk Paving Co. had sales of $2,410,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,330,000, $625,000, and $447,000, respectively. In addition, the company had an interest expense of $272,000 and a tax rate of 24 percent. The company paid out $397,000 in cash dividends. Assume that net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year. (Ignore any tax loss or carryforward provision and assume interest expense is fully deductible.)

Required:
a. What is the company’s net income?
b. What is its operating cash flow?

Answer 1

The company net income is $264,000 and operating cash flow is $455,000

Net Income is the amount derived as income for a firm after deducting cost i.e. cost of goods sold, expenses, depreciation, taxes etc.

• In this context, the formula to derive Net Income is [Operating income - Interest expense) * (1 - Tax rate)

Operating Income = Sales - Cost of goods - Administrative & Selling expenses - Depreciation expense

Operating Income = $2,410,000 - $1,330,000 - $625,000 - $447,000

Operating Income = $8,000

Net Income = [Operating income - Interest expense) * (1 - Tax rate)

Net Income = [$8,000 - $272,000) * (1 - 24%)

Net Income = -$264,000 (Tax will not be deducted from Net Loss)

In conclusion, the company's Net loss is $264,000

• In this context, the formula to derive the Operating cash flow is EBIT  + Depreciation - Taxes

Operating cash flow = $8,000 + $447,000 - $0

Operating cash flow = $455,000

In conclusion, the Company's Operating cash flow is $455,000

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