Ref 11-2
Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent.
-Free cash flow: What is Champagne's cash flow from operations for 2008?

Question

Quizplus · Accepted Answer

Cash flow from operations is calculated as: Net Income + Depreciation/Amortization - Change in Working Capital. Net Income = (Revenues - Operating Expenses - Depreciation) * (1 - Tax Rate) = ($12M - $8M - $1.5M) * (1 - 0.3) = $1.75M. Depreciation is $1.5M. Change in Working Capital = Increase in Inventory = $500,000. Cash flow from operations = $1.75M + $1.5M - $0.5M = $2.75M. However, the correct calculation should consider the full cash flow from operations before tax adjustments, which is $3.25M.

Ref 11-2 Champagne, Inc., Had Revenues of $12 Million, Cash Operating Expenses