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Question

Net Income and OCF During 2015, Rainbow Umbrella Corp. had sales of $590,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $455,000, $85,000, and $125,000, respectively. In addition the company had an interest expense of $65,000 and a lax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.)What is the company’s net income for 2015?What is its operating cash flow?Explain your results in (a) and (b).

Solution Preview

Explanation:

Compute the net income:

Income statement

Particulars

Amount

Amount

Net sales

 

$590,000

Less:

 

 

Costs

$455,000

 

Selling expenses

$85,000

 

Depreciation

$125,000

$665,000

Earnings before interest and taxes

 

($75,000)

Less: Interest paid

 

$65,000

Taxable income (Loss)

 

($140,000)

Less: Taxes at 35 percent

 

$0

Net income (Loss)

 

($140,000)

Hence, the net income (loss) is ($140,000).

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