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.a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%.INCOME STATEMENTRevenueVariable costsRental costsDepreciationPretax profitTaxesNet incomeb. Calculate the operating cash flow for the repair shop using the three methods given below:Now calculate the operating cash flow.Dollars in minus dollars out.Adjusted accounting profits.Add back depreciation tax shield.Methods of Calculation Operating Cash Flowi. Dollars in Minus Dollars Out ii. Adjusted Accounting profits iii. After tax Operating Cash flow

Answer 1

A) Net income = $61,600

B)

I. Dollars in Minus Dollars Out = $94,000

II. Adjusted Accounting profit = $77,000

III. After tax Operating Cash flow = $78,600

Step-by-step explanation:

a) Below is the income statement for the bicycle repair shop

Revenue:

Revenues = $188,000

Total Revenue = $188,000

Expenses:

Variable costs = $57,000

Rent (of shop) = $37,000

Total Expenses = $94,000

Gains:

Gain = $0

Losses:

Depreciation (of repair tools) = $17,000

Income Before Tax = $77,000

Income Tax (at 20%) = $15,400

Net Income = $61,600

b) We calculate Operating Cash Flow using 3 methods:

I. Dollars in Minus Dollars Out = Revenue - Expenses = $(188,000 - 94,000)

Dollars in Minus Dollars Out = $94,000

II. Adjusted accounting profits = Total monetary revenue - Total costs

Total costs = Total Expenses + Depreciation = $(94,000 + 17,000)

Total costs = $111,000

Accounting profit = $(188,000 - 111,000)

Accounting profit = $77,000

III. Add back depreciation tax shield = Net Income + Depreciation

Add back depreciation tax shield = $(61,600 + 17,000)

Add back depreciation tax shield = $78,600