Question

The owner of a bicycle repair shop forecasts revenues of $188,000 a year. Variable costs will be $57,000, and rental costs for the shop are $37,000 a year. Depreciation on the repair tools will be $17,000.Prepare an income statement for the shop based on these estimates. The tax rate is 40%.

Answer 1

Revenues=$188,000

Less: Variable Costs=$57,000

Less: Rentals=$37,000

Earnings before depreciation and tax=$94,000

Less: Depreciation =$17,000

Earnings before tax=$77,000

Less: Tax40%=$30,800

Net Income=$46,200

a) Dollars in minus dollars out

Dollars in = Revenues = $188,000

Dollars out = Variable cost + Rentals + Tax = $57,000 + $37,000 + $30,800 = $124,800

Operating cash flow = $188,000 - $124,800 = $63,200

b) Adjusted accounting profits

Operating cash flow = Net income + Depreciation = $46,200 + $17,000 = $63,200

c) Add back depreciation tax shield

Operating cash flow = Earnings before depreciation and tax x (1 - tax rate) + Depreciation tax shield

or, Operating cash flow = $94,000 x (1 - 0.40) + $17,000 x 40% = $63,200

Yes, all the results are same.