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Chapter 2: 3DQ (page 46)

Explain how depreciation generates actual cash flows for the company.

Short Answer

Expert verified

Depreciation refers to the decrease in the fair value of the company鈥檚 assets over a period of time. Depreciation is charged due to the usage of the assets by the organization and their obsolescence.

Step by step solution

01

Cash flow

The cash flow of the company is defined as the movement of cash and cash equivalent within and outside the organization. The payment of cash by the company is treated as the cash outflow, and the receipt of cash is termed as the cash inflow.

02

Depreciation generates the actual cash flow for the company

Depreciation is an allowable expense while computing the taxable income.Hence, its presence will reduce the amount of tax liability of the company and generate the cash flow by reducing the income tax amount payable by the company.

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Most popular questions from this chapter

Shock Electronics sells portable heaters for \(35 per unit, and the variable cost to produce them is \)22. Mr. Amps estimates that the fixed costs are $97,500.

b. Fill in the table (in dollars) to illustrate the break-even point has been achieved.

Sales

  • Fixed cost
  • Total variable cost

Net profit (loss)

Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?

The Rogers Corporation has a gross profit of \(880,000 and \)360,000 in depreciation expense. The Evans Corporation also has \(880,000 in gross profit,

with \)60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company. Given that the tax rate is 40 percent, compute the cash flow for both companies.

Explain the difference in cash flow between the two firms.

Dr. Zhiva虁go Diagnostics Corp.鈥檚 income statement for 20X1 is as follows

Sales\( 2790000
Cost of goods sold1790000
Gross profits\) 1000000
Selling and administrative expenses302000
Operating profits\( 698000
Interest Expense54800
Income before tax\) 643200
Taxes 30%192960
Income after tax$ 450240

b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?

A-Rod Fishing Supplies had sales of \(2,500,000 and cost of goods sold of \)1,710,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,680,000. What was the firm鈥檚 operating profit?
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