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Hailey, Inc., has sales of $19,570, costs of $9,460, depreciation expense of $2,130, and interest...

Question:

Hailey, Inc., has sales of {eq}\$19,570 {/eq}, costs of {eq}\$9,460 {/eq}, depreciation expense of {eq}\$2,130 {/eq}, and interest expense of {eq}\$1,620 {/eq}. Assume the tax rate is {eq}35 \% {/eq}. What is the operating cash flow, or OCF?

Operating Cash Flow:

The cash flow statement is a critical part of the financial statements. The operating cash flow shows the cash generated from the core operations of the business. When a company has robust operating cash flows, capital expenditure can be funded through internal cash flows than a dilution of equity or leveraging.

Answer and Explanation:

.

Given -

  • Sales = $19,570
  • Cost = $9,460
  • Depreciation = $2,130

Therefore,

  • Earnings Before Interest and Tax = Sales - Cost - Depreciation
  • Earnings Before Interest and Tax = 19,570 - 9,460 - 2,130
  • Earnings Before Interest and Tax = $7,980

Interest Expense = $1,620

  • Earnings Before Tax = Earnings Before Interest and Tax - Interest Expense
  • Earnings Before Tax = 7,980 - 1,620
  • Earnings Before Tax = $6,360

Tax Rate = 35%

  • Net Income = Earnings Before Tax * (1 - Tax Rate )
  • Net Income = 6,360 * (1 - 0.35 )
  • Net Income = $4,134

Once we have the net income, the operating cash flow can be calculated as follows -

  • Operating Cash Flow = Net Income + Depreciation
  • Operating Cash Flow = 4,134 + 2,130
  • Operating Cash Flow = $6,264

Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
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