Question

The owner of a bicycle repair shop forecasts revenues of $192,000 a year. variable costs will be $58,000, and rental costs for the shop are $38,000 a year. depreciation on the repair tools will be $18,000. prepare an income statement for the shop based on these estimates. the tax rate is 20%. calculate the operating cash flow for the repair shop using the three methods given below: dollars in minus dollars out. adjusted accounting profits. add back depreciation tax shield.

Answer 1

To calculate the operating cash flow for the bicycle repair shop, subtract the total costs from the revenues. The accounting profit is calculated by subtracting the total costs from the revenues. The operating cash flow can be calculated using the dollars in minus dollars out method, the adjusted accounting profits method, and by adding back the depreciation tax shield.

Step-by-step explanation:

To prepare the income statement for the bicycle repair shop, we need to subtract the total costs from the revenues. The fixed costs include rental costs and depreciation, which amount to $38,000 + $18,000 = $56,000. The variable costs are given as $58,000. Therefore, the total costs are $56,000 + $58,000 = $114,000.

Next, we can calculate the accounting profit by subtracting the total costs from the revenues: $192,000 - $114,000 = $78,000.

To calculate the operating cash flow using the three methods:

1. Dollars In Minus Dollars Out: Operating Cash Flow = Revenues - Total Costs = $192,000 - $114,000 = $78,000.
2. Adjusted Accounting Profits: Operating Cash Flow = Accounting Profit + Depreciation = $78,000 + $18,000 = $96,000.
3. Add Back Depreciation Tax Shield: Operating Cash Flow = Accounting Profit + Depreciation * Tax Rate = $78,000 + $18,000 * 0.20 = $81,600.