Question

The Rogers Corporation has a gross profit of $704,000 and $333,000 in depreciation expense. The Evans Corporation also has $704,000 in gross profit, with $49,300 in depreciation expense. Selling and administrative expense is $191,000 for each company.

a. Given that the tax rate is 40 percent, compute the cash flow for both companies.

Cash Flow Rogers=
Cash Flow Evans=

b. Calculate the difference in cash flow between the two firms.

Answer 1

a. Cash Flow Rogers = $441,000

Cash Flow Evans = $327,520

b. $113,480

Step-by-step explanation:

The computation of the cash flow for both companies are shown below:

a. For Cash Flow Rogers

= Gross profit - Selling and administrative expense - income tax expense + depreciation expense × tax rate

where,

Income tax expense = (Gross profit - Selling and administrative expense) × income tax rate

= ($704,000 - $191,000) × 40%

= $205,200

And, the other items values would remain the same

Now put these values to the above formula

So, the value would equal to

= $704,000 - $191,000 - $205,200 + $333,000 × 40%

= $307,800 + $133,200

= $441,000

For Cash Flow Evans

= Gross profit - Selling and administrative expense - income tax expense + depreciation expense × tax rate

where,

Income tax expense = (Gross profit - Selling and administrative expense) × income tax rate

= ($704,000 - $191,000) × 40%

= $205,200

And, the other items values would remain the same

Now put these values to the above formula

So, the value would equal to

= $704,000 - $191,000 - $205,200 + $49,300 × 40%

= $307,800 + $19,720

= $327,520

b. The computation of the difference in cash flow between the two firms are shown below:

= Cash Flow Rogers - Cash Flow Evans

= $441,000 - $327,520

= $113,480