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Chapter 4: Q1BP (page 407)

Assume a corporation has earnings before depreciation and taxes of \(90,000, depreciation of \)40,000, and a 30 percent tax bracket. Compute its cash flow using the following format:

Earnings before depreciation and taxes

---

Depreciation

---

Earnings before taxes

---

Taxes @ 30%

---

Earnings after taxes

---

Depreciation

---

Cash flow

---

Short Answer

Expert verified

Answer

Cash flow is equal to $75,000.

Step by step solution

01

Definition of Depreciation Expenses

Depreciation expense is the expense incurred by the company by using the fixed assets in the operation of the business. This is a non-cash expense representing the decline in the value of the fixed asset due to its wear and tear.

02

Calculation of cash flow

Particular

Amount $

Earnings before depreciation and taxes

$90,000

Depreciation

(40,000)

Earnings before taxes

$50,000

Taxes @ 30%

(15,000)

Earnings after taxes

$35,000

Depreciation

$40,000

Cash flow

$75,000

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