Question

You are given the following information: sales, $260; expenses other than depreciation, $140; depreciation expense, $50; marginal income tax rate, 35%. Calculate the net after-tax cash flow effect of the preceding information using both the indirect and direct methods. (Round your answers to 2 decimal places.)

Answer 1

See below

Step-by-step explanation:

1. The net cash after-tax cash flow effect of the preceding information of using the indirect method.

First, we need to calculate the pretax income.

Pretax income = Sales - Expenses other than depreciation - depreciation expense

Pretax income = $260 - $140 - $50 = $70

Also,

Tax expense = 35% × pretax income $70 = $24.5

Therefore, the indirect method would be;

Pretax income

$70

Less:

Tax expense

($24.5)

After tax income

$45.5

Add:

Depreciation expense

$50

After-tax cash flow

$95.5

Direct method

After tax cash operating income

[($260 - $140 - $50) × (1 - tax rate 35%)]

$45.5

Add :

Depreciation expense

$50

After tax cash flow

$95.5