Question

During 2019, Rainbow Umbrella Corp. had sales of $940,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $680,000, $85,000, and $165,000, respectively. In addition, the company had an interest expense of $53,000 and a tax rate of 21 percent. (Assume that interest is fully deductible.) a. What is the company's net income for 2019? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations.) b. What is its operating cash flow? (Do not round intermediate calculations.)

Answer 1

a. - $43,000

b. $10,000

Step-by-step explanation:

(a) The computation of the net income is shown below:

= Sales - cost of goods sold - administrative and selling expenses - depreciation expenses - interest expense - income tax expense

= $940,000 - $680,000 - $85,000 - $165,000 - $53,000 - 0

= - $43,000

The income tax expense should be zero as the amount comes in negative

(b) The computation of the operating cash flow is shown below:

= EBIT + Depreciation

where,

EBIT = Sales - cost of goods sold - administrative and selling expenses - depreciation expenses

= $940,000 - $680,000 - $85,000 - $165,000

= $10,000 + $165,000

= $175,000