Part 1
During 2010, Raines Umbrella Corp. had sales of $850,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $610,000, $110,000 and $140,000, respectively. In addition, the company has an interest expense of $85,000 and a tax rate of 35 percent. (Ignore any tax loss carry-back or carry-forward provisions.)
a. What is Raines’ net income for 2010?
b. What is its operating cash flow?
c. Explain your results in (a) and (b)?
Part 2
Suppose Raines Umbrella Corp. paid out $63,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what do you know about the firm’s long-term debt account?
Cgnd
Part 1:
a. To find Raines Umbrella Corp.'s net income for 2010, we need to subtract the various expenses and taxes from the sales revenue.
Net income = Sales - Cost of Goods Sold - Administrative and Selling Expenses - Depreciation Expenses - Interest Expenses - Taxes
Given:
Sales = $850,000
Cost of Goods Sold = $610,000
Administrative and Selling Expenses = $110,000
Depreciation Expenses = $140,000
Interest Expenses = $85,000
Tax Rate = 35%
Net income = $850,000 - $610,000 - $110,000 - $140,000 - $85,000 - (35% * $850,000)
Net income = $850,000 - $610,000 - $110,000 - $140,000 - $85,000 - $297,500
Net income = $612,500
Therefore, Raines Umbrella Corp.'s net income for 2010 is $612,500.
b. To calculate the operating cash flow, we need to consider the net income and make adjustments for non-cash expenses, such as depreciation.
Operating Cash Flow = Net Income + Depreciation Expenses
Given:
Net Income = $612,500
Depreciation Expenses = $140,000
Operating Cash Flow = $612,500 + $140,000
Operating Cash Flow = $752,500
Therefore, Raines Umbrella Corp.'s operating cash flow for 2010 is $752,500.
c. In part (a), the net income represents the profit that the company has earned during the year after deducting all expenses and taxes. It provides an indication of the company's overall financial performance.
In part (b), the operating cash flow shows the amount of cash generated from the company's core operations, excluding non-cash expenses such as depreciation. It gives a measure of the company's ability to generate cash from its day-to-day activities.
Part 2:
If Raines Umbrella Corp. paid out $63,000 in cash dividends, we can infer that the company had sufficient cash reserves or generated enough cash from its operations to distribute as dividends.
Based on the given information that spending on net fixed assets and net working capital was zero, and no new stock was issued during the year, it suggests that the firm's long-term debt account is independent of these factors. The payment of dividends does not provide direct information about the long-term debt account. Therefore, we cannot determine anything about the long-term debt account based solely on the information provided.