Consider The Following Income Statement Sales 83

consider The Following Income Statementsales 83

Consider the following income statement: Sales $839,408; Costs $546,112; Depreciation $124,200; Taxes 35%. Calculate the EBIT, net income, operating cash flow (OCF), and depreciation tax shield.

Paper For Above instruction

The problem involves analyzing a company's income statement to determine key financial metrics: EBIT (Earnings Before Interest and Taxes), net income, operating cash flow (OCF), and the depreciation tax shield. These calculations are fundamental to financial analysis, providing insights into the company's profitability and cash generation capacity.

Introduction

The income statement provided offers key components including sales revenue, costs, depreciation expense, and tax rate, which are essential to derive the financial metrics necessary for evaluating a firm's performance. Understanding how to compute EBIT, net income, OCF, and depreciation tax shield from these figures enables stakeholders to assess operational efficiency and tax implications. This analysis exemplifies critical financial calculations used routinely in corporate financial planning and analysis.

Calculation of EBIT

EBIT, or Earnings Before Interest and Taxes, reflects a company's profitability from operations excluding interest and taxes. It can be calculated as sales minus operating costs, including depreciation.

EBIT = Sales - Costs - Depreciation

Substituting the given values:

EBIT = $839,408 - $546,112 - $124,200 = $169,096

Calculation of Net Income

Net income accounts for taxes and provides the bottom-line profit. It can be derived from EBIT as follows:

Tax expense = EBIT × Tax rate = $169,096 × 0.35 = $59,183.60

Net Income = EBIT - Taxes = $169,096 - $59,183.60 = $109,912.40

Calculation of Operating Cash Flow (OCF)

Operating cash flow measures cash generated from operations, often computed as net income plus depreciation (non-cash expense):

OCF = Net Income + Depreciation = $109,912.40 + $124,200 = $234,112.40

Calculation of Depreciation Tax Shield

The depreciation tax shield represents the tax savings attributable to depreciation expenses, calculated as:

Depreciation Tax Shield = Depreciation × Tax rate = $124,200 × 0.35 = $43,470

Conclusion

In summary, from the provided income statement: the EBIT is approximately $169,096; net income is approximately $109,912.40; operating cash flow is approximately $234,112.40; and the depreciation tax shield equals \$43,470. These metrics provide a comprehensive view of the company's operational profitability and tax benefits associated with depreciation.

References

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