Depreciation and accounting cash flow A firm in the third year of depreciating its only asset, which originally cost $180,000 and has a 5 year MACRS recovery period, has gathered the following data relative to the current year’s operations.
|
Accruals |
$ 15,000 |
|
Current assets |
120,000 |
|
Interest expense |
15,000 |
|
Sales revenue |
400,000 |
|
Inventory |
70,000 |
|
Total costs before depreciation, interest, and taxes |
290,000 |
|
Tax rate on ordinary income |
40% |
a. Use the relevant data to determine the accounting cash flow from operations (see Equation 3.1) for the current year.
Equation 3.1
Cash flow from operations=
Net profits after taxes + Depreciation and other noncash charges
b. Explain the impact that depreciation, as well as any other noncash charges, has on a firm’s cash flows.