Question

Your firm has net income of $292 on total sales of $1,100. Costs are $620 and depreciation is $110. The tax rate is 21 percent. The firm does not have interest expenses. What is the operating cash flow?

A) $662
B) $402
C) $370
D) $292
E) $480

Answer 1

The operating cash flow (OCF) is calculated by adding depreciation to net income and adjusting for taxes. Based on the given figures, the OCF is $318, which is not listed in the given options. The correct calculation shows the closest answer given, $370, is incorrect.

Step-by-step explanation:

To calculate the operating cash flow (OCF), we add back depreciation to net income and adjust for taxes. The formula to find OCF is:

OCF = Net Income + Depreciation + (Taxes on Operating Cash Flow)

Given that the net income is $292, depreciation is $110, and taxes are 21 percent of the income before depreciation, we first calculate the income before depreciation (which is net income plus depreciation), yielding $292 + $110 = $402 as earnings before taxes and depreciation. We then calculate taxes on the income before depreciation, which is 21% of $402, yielding $84.42 (rounded down to $84 for simplicity). The operating cash flow is then calculated as:

OCF = Net Income + Depreciation - Taxes

OCF = $292 + $110 - $84

OCF = $402 - $84

OCF = $318

Thus, the answer is not listed among the options provided. The closest answer is C) $370, but based on the given data and calculations, this is incorrect.