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Income and Cash Flow Analysis The Berndt Corporation expects to have sales of $15 million

Income and Cash Flow Analysis The Berndt Corporation expects to have sales of $15 million

Income and Cash Flow Analysis

The Berndt Corporation expects to have sales of $15 million.Costs other than depreciation are expected to be 70% of sales, anddepreciation is expected to be $2.25 million. All sales revenueswill be collected in cash, and costs other than depreciation mustbe paid for during the year. Brendt's federal-plus-state tax rateis 35%. Berndt has no debt.

Set up an income statement. What is Berndt's expected net cashflow? Enter your answer in dollars. For example, an answer of $1.2million should be entered as 1,200,000.

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Suppose Congress changed the tax laws so that Berndt'sdepreciation expenses doubled. No changes in operations occurred.What would happen to reported profit and to net cash flow?

-Select-IIIIIIIVVItem 2

I. If depreciation doubled, taxable income wouldnot be affected since depreciation and amortization are non-cashexpenses. Net cash flow would also be unaffected.

II. If depreciation doubled, taxable income wouldnot be affected since depreciation and amortization are non-cashexpenses. Net cash flow would double.

III. If depreciation doubled, taxable income wouldfall to zero, taxes would be zero, and net cash flow would beunaffected.

IV. If depreciation doubled, taxable income wouldfall to zero, taxes would be zero, and net cash flow wouldrise.

V. If depreciation doubled, taxable income wouldfall to zero, taxes would be zero, and net cash flow woulddecline.

Now suppose that Congress, instead of doubling Berndt'sdepreciation, reduced it by 50%. How would profit and net cash flowbe affected?

-Select-IIIIIIIVVItem 3

I. If depreciation were halved, taxable income andnet cash flow would rise but taxes would fall.

II. If depreciation were halved, taxable incomeand taxes would rise but net cash flow would fall.

III. If depreciation were halved, taxable income,taxes, and net cash flow would all rise.

IV. If depreciation were halved, taxable incomeand taxes would decline but net cash flow would rise.

V. If depreciation were halved, taxable income,taxes, and net cash flow would all decline.

If this were your company, would you prefer Congress to causeyour depreciation expense to be doubled or halved? Why?

-Select-IIIIIIIVVItem 4

I. You should prefer to have higher depreciationcharges and therefore higher net income. Net income represents thefunds that are available to the owners to withdraw from the firmand, therefore, net income should be more important to them thannet cash flows.

II. You should prefer to have lower depreciationcharges and therefore higher net income. Net income represents thefunds that are available to the owners to withdraw from the firmand, therefore, net income should be more important to them thannet cash flows.

III. You should prefer to have higher depreciationcharges and therefore higher net income. Net cash flows are thefunds that are available to the owners to withdraw from the firmand, therefore, cash flows should be more important to them thannet income.

IV. You should prefer to have higher depreciationcharges and therefore higher cash flows. Net cash flows are thefunds that are available to the owners to withdraw from the firmand, therefore, cash flows should be more important to them thannet income.

V. You should prefer to have lower depreciationcharges and therefore higher cash flows. Net cash flows are thefunds that are available to the owners to withdraw from the firmand, therefore, cash flows should be more important to them thannet income.

Abhinav 04-Dec-2019

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