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During the year, the Senbet Discount Tire Company had gross sales of $1.12 million. The firm's...

Question:

During the year, the Senbet Discount Tire Company had gross sales of $1.12 million. The firm's cost of goods sold and selling expenses were $531,000 and $221,000, respectively. Senbet also had notes payable of $860,000. These notes carried an interest rate of 6 percent. Depreciation was $136,000. Senbet's tax rate was 40 percent.

Required:

a. What was Senbet's net income? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to the nearest whole dollar amount (e.g., 32).)

Net income $         

b. What was Senbet's operating cash flow? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to the nearest whole dollar amount (e.g., 32).)

Operating cash flow $         

Net Income and Cash Flows:

The net income of a firm can be ascertained by using absorption costing approach or variable costing approach. The classification of product costs and period costs varies under these methods. On the other hand, the operating cash flows can be determined by using direct method or indirect method.

Answer and Explanation:

Answer to a

The operating profit before tax is given by:

  • = Gross sales - (cost of goods sold + selling expenses + depreciation expense)
  • = $1.12 million - ($531,000 + $221,000 + $136,000)
  • = $1.12 million - $888,000
  • = $232,000

The value of profit before tax is given by:

  • = Operating profit before tax - (notes payable * interest rate)
  • = $232,000 - ($860,000 * 6%)
  • = $180,400

Senbet's net income is given by:

  • = Profit before tax * (1 - tax rate)
  • = $180,400 * (1 - 40%)
  • = $108,240

Net income $108,240

Answer to b

The operating cash flows is given by:

  • = Net income + depreciation expense
  • = $108,240 + $136,000
  • = $244,240

Operating cash flow $244,240


Learn more about this topic:

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What Is Net Income? - Definition & Formula

from OSAT Business Education (CEOE) (040): Practice & Study Guide

Chapter 69 / Lesson 5
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