Sheryl’s Shipping had sales last year of $15,000. The cost of goods sold was $7,500, general and administrative expenses were $2,000, interest expenses were $1,500, and depreciation was $2,000. The firm’s tax rate is 30%.
a. What are the earnings before interest and taxes?
b. What is net income?
c. What is cash flow from operations?
Earnings before interest and taxes $ 1500
Net income $650
Cash flow from operations 1650
Operating cash flow is calculated by a relatively simple equation:EBIT (earnings before interest and taxes)+ Depreciation- Taxes.
To calculate the answers, we need to follow these steps:
a. Calculate the Earnings Before Interest and Taxes (EBIT):
EBIT = Sales - Cost of Goods Sold - General and Administrative Expenses
EBIT = $15,000 - $7,500 - $2,000
EBIT = $5,500
b. Calculate the Net Income:
Net Income = EBIT - Interest Expenses - Taxes
Net Income = $5,500 - $1,500 - ($5,500 * 0.30)
Net Income = $5,500 - $1,500 - $1,650
Net Income = $2,350
c. Calculate the Cash Flow from Operations:
Cash Flow from Operations = Net Income + Depreciation
Cash Flow from Operations = $2,350 + $2,000
Cash Flow from Operations = $4,350
Therefore:
a. The earnings before interest and taxes (EBIT) are $5,500.
b. The net income is $2,350.
c. The cash flow from operations is $4,350.
To find the answers to these questions, we need to calculate various financial measures. Let's break it down step by step.
a. Earnings before interest and taxes (EBIT) can be calculated by subtracting the cost of goods sold (COGS) and general and administrative expenses (G&A) from the sales revenue.
EBIT = Sales - COGS - G&A
In this case, Sales = $15,000, COGS = $7,500, and G&A = $2,000.
Therefore,
EBIT = $15,000 - $7,500 - $2,000 = $5,500
So, the earnings before interest and taxes (EBIT) is $5,500.
b. Net income can be calculated by subtracting interest expenses and taxes from the EBIT.
Net Income = EBIT - Interest Expenses - (Tax Rate * EBIT)
In this case, EBIT = $5,500, Interest Expenses = $1,500, and Tax Rate = 30%.
Therefore,
Net Income = $5,500 - $1,500 - (0.3 * $5,500) = $5,500 - $1,500 - $1,650 = $2,350
So, the net income is $2,350.
c. Cash flow from operations can be calculated by adding depreciation expenses to the net income.
Cash Flow from Operations = Net Income + Depreciation
In this case, Net Income = $2,350 and Depreciation = $2,000.
Therefore,
Cash Flow from Operations = $2,350 + $2,000 = $4,350
So, the cash flow from operations is $4,350.