The owner of a bicycle repair shop forecasts revenues of $180,000 a year. Variable costs will be $55,000, and rental costs for the shop are $35,000 a year. Depreciation on the repair tools will be $15,000.

a. Prepare a income statement for the shop based on these estimates. The tax rate is 20%.

INCOME STATEMENT:

$

Revenue

180,000

Less: Variable Costs

55,000

Gross Margin

125,000

Less Fixed Costs:

Rent Costs

35,000

Depreciation

15,000

Profit Before Tax

75,000

Less tax@20%

15,000

Profit after tax

60,000

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b. Calculate the operating cash flow for the repair shop using the three methods given below:

Now calculate the operating cash flow.

Methods of CalculationOperating Cash Flow

1. Dollars in minus dollars out.
2. Adjusted accounting profits.
3. Add back depreciation tax shield.