Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented,taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?
A) $200
B) $1,500
C) $2,200
D) $3,500
E) $4,200

Question

Quizplus · Accepted Answer

Operating cash flow can be calculated using the top-down approach as follows:

Sales revenue $6,000
- Cash expenses $2,500
= Earnings before interest and taxes (EBIT) $3,500
- Depreciation expense $1,000
= Earnings before taxes (EBT) $2,500
- Taxes $1,300
= Net income $1,200
+ Depreciation expense $1,000
= Operating cash flow $2,200

Therefore, the amount of the operating cash flow using the top-down approach is $2,200.

Ronnie's Coffee House Is Considering a Project Which Will Produce