Answer to Question #292931 in Management for keda

Question

Question 1 

Josh and Amy are finance trainees at a company which has been reporting a positive cash flow for the last 5 years. Both Josh and Amy have learned in their finance courses at the university that “cash is king” and is more important than reported profits by a company. Guided by this knowledge, none of them feels a need to review the company’s cash flow pattern over time. Are they necessarily correct in their understanding about a firm’s long-term cash flow situation?

Discuss briefly in no more than 100 words

Question 2

Staycate Travels Inc. reports a gross profit of $35,000, interest expense of $4,000, a tax rate of 30% and earning after taxes of $8,610. What is Staycate’s depreciation expense?

Answer 1

1) As trainees in finance, they should understand that Cash flow statement and most importantly cash balance is crucial in the future of the company. It is the cash balance that determines whether the company can invest in long term heavy capital investment or not. They should review the cash flow and seek to understand whether the funds are being used in improving the sales in the company or the money is just being kept idle in the bank. 

2) Earnings after tax= Earnings before tax x ( 1 – Tax rate )

$8,610 = Earnings before tax x ( 1 – 30%)

Earnings before tax = $8,610 / ( 1 – 0.30 )

= $8,610 / 0.70

= $12,300

Gross Profit - Administrative and Selling expenses – Depreciation – Interest = Earnings before tax

$12,300 = $35,000 - $0 – Depreciation - $4,000

So, Depreciation = $35,000 - $0 - $4,000 - $12,300

= $18,700