Ref 11-1
Provo, Inc., had revenues of $10 million, cash operating expenses of $5 million, and depreciation and amortization of $1 million during 2008. The firm purchased $500,000 of equipment during the year while increasing its inventory by $300,000 (with no corresponding increase in current liabilities). The marginal tax rate for Provo is 40 percent.
Reference: Ref 11-1
-Free cash flow: What is Provo's cash flow from operations for 2008?

Question

Quizplus · Accepted Answer

Cash flow from operations can be calculated as follows: Start with revenues ($10 million) then subtract cash operating expenses ($5 million) and taxes. Taxes are calculated on the operating income, which is revenues minus operating expenses and depreciation ($10M - $5M - $1M = $4M). The tax on the operating income is 40% of $4 million, which is $1.6 million. So, the cash flow from operations is $10M - $5M - $1.6M = $3.4 million.

Ref 11-1 Provo, Inc., Had Revenues of $10 Million, Cash Operating Expenses