Depreciation and Accounting Cash Flow
A firm has gathered the following data for its current year's operations. The firm has only one asset, which has a 3-year recovery period. The cost of the asset a year ago was $165,000. The depreciation rate is 45%.
Accruals - $12,500
Current assets - $135,000
Interest expense - $13,550
Sales revenue - $420,000
Inventory - $82,300
Total costs before depreciation, interest, and taxes - $295,000
Tax rate on ordinary income - 40%
a. Calculate the firm's operating cash flow for the current year.
b. Why is it important to add back noncash items such as depreciation when calculating cash flows?