Q21BP The Rogers Corporation has a gro... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: Q21BP (page 52)

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.

Short Answer

Expert verified

The cash flow of the Rogers Corporation is $600,000, and the cash flow of the Evans Corporation is $480,000. In addition, the difference in the cash flow is due to tax savings on the depreciation.

Step by step solution

Net profit after tax of the Rogers Corporation

$\begin{array}{rcl} Net profit after tax & = & (Gross profit - depriciation - selling and administrative expenxse) (1 - Tax) \\ = & ($ 880, 000 - $ 360, 000 - $ 120, 000) (1 - 0.40) \\ = & $ 240, 000 \end{array}$

Cash flow of the Rogers Corporation

$\begin{array}{rcl} Cash flow & = & Net profit after tax + depriciation \\ = & $ 240, 000 + $ 360.000 \\ = & $ 600, 000 \end{array}$

Net profit after tax of the Evans Corporation

$\begin{array}{rcl} Net profit after tax & = & (Gross profit - depriciation - selling and administrative expenxse) (1 - Tax) \\ = & ($ 880, 000 - $ 60, 000 - $ 120, 000) (1 - 0.40) \\ = & $ 420, 000 \end{array}$

Cash flow of the Rogers Corporation

$\begin{array}{rcl} Cash flow & = & Net profit after tax + depreciation \\ = & $ 420, 000 + $ 60, 000 \\ = & $ 480, 000 \end{array}$

Explanation for change in the cash flow of two companies

The cash flow of both companies is different because of the depreciation. Depreciation is a non-cash transaction, but the tax savings due to depreciation are treated as the cash inflow for the company. In the given case, the depreciation of both the companies is different, and because of this reason, the cash flow is different.

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	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

Indicate whether item is on Balance sheet (BS) or Income statement (IS)	If on Balance sheet, designate which category	Item
		Accounts receivable
		Retained earnings
		Income tax expense
		Accrued expense
		Cash
		Selling and administrative expenses
		Plant and equipment
		Operating expenses
		Marketable securities
		Interest expense
		Sales
		Notes payable (6 month)
		Bonds payable, maturity 2019
		Common stock
		Depreciation expense
		Inventories
		Capital in excess of par value
		Net income (earning after tax)
		Income tax payable

Sales	$900,000
Shares outstanding	50,000
Cost of goods sold	400,000
Interest expenses	40,000
Selling and administration expenses	60,000
Depreciation expenses	20,000
Preferred stock dividend	80,000
Taxes	50,000

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Short Answer

Step by step solution

Net profit after tax of the Rogers Corporation

Cash flow of the Rogers Corporation

Net profit after tax of the Evans Corporation

Cash flow of the Rogers Corporation

Explanation for change in the cash flow of two companies

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