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During the year, the Senbet Discount Tire Company had gross sales of $1.15 million. The firm’s cost of goods sold and selling expenses were $534,000 and $224,000, respectively. The firm also had notes payable of $890,000. These notes carried an interest rate of 5 percent. Depreciation was $139,000. The firm’s tax rate was 40 percent. a. What was the firm’s net income? b. What was the firm’s operating cash flow?

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Answer:

A: $125,100

B: $392,000

Explanation:

A: The Net Income is calculated after deducting all the expenses i.e. Cost of goods sold, selling expenses, depreciation, interest payable on Notes ($44,500) as well as taxation ($83,400 i.e. 40% of income before taxation of $208,500).

B: Operating cash flow is calculated by adding non-cash items i.e. depreciation of $139,000 to the Income before interest and tax of $253,000

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