accounting
uatoooonec
bioinfo_cost_accounting_2016.pptBNFO 621: Business and Entrepreneurship: ACCOUNTING
Roxanne M. Spindle
Associate Professor of Accounting
February 16 &18, 2016
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What is accounting?
- The language of business
- Measures financial aspects of a business
- Communicates this information to decision makers
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Kinds of accounting
- Financial (score card)
- Cost (projecting costs and revenues)
- Amounts
- Timing
- Tax (Giving Uncle his share)
- Significant cost
- Can be minimized in many cases
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Want to know more?
- Financial accounting -- Acct 507
- Takes a users approach to financial statement analysis
- Cost accounting – Acct 608
- MBA course so management oriented
- Tax accounting -- ???
- Best to pay for advice from CPA that specializes in start up companies
- The rules are just too strange for amateurs
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Why should everyone in business understand financial accounting??
- Many business decisions are based on financial accounting information.
- Since accounting information is prepared according to “rules,” an understanding of these rules is necessary for the appropriate use of the information.
“Rules” = Generally Accepted Accounting Principles (GAAP)
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Some accounting terms
- Cash items
- What goes in and out of checking account
- Accrual items
- Accounting adjustments that “match” the timing of income and expenses
- Footnotes
- Explain all the accounting adjustments
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Financial Statements
- Income statement
- For a given period
- Balance sheet
- As of end of period
- Statement of cash flows
- Separates cash items from accounting adjustments
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Balance Sheet
Assets = Liabilities + Equity
- Assets
- Tangible/intangible
- Acquired by
- cash, debt, or exchange
- Historical cost
- never increased
- Some are reduced by depreciation
- Some are reduced to current market value
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Balance Sheet
Assets = Liabilities + Equity
- Liabilities
- Bonds
- Bank debt
- Mortgages
- Accounts payable
- Unearned income
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Balance Sheet
Assets = Liabilities + Equity
- Equity
- What belongs to owners
- Direct contributions to business
- Income earned and retained
- Other comprehensive income
- GAAP adjustments not included in income statement
- You don’t need to go here
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Comparison of Financial and Managerial Accounting
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There are seven key differences between managerial accounting and financial accounting:
Financial accounting reports are prepared for external users. Managerial
accounting reports are prepared for internal users.
- Financial accounting summarizes past transactions. Managerial accounting
has a strong emphasis on the future. - Financial accounting data should be objective and verifiable. Managerial
accounting data should be relevant for the decision at hand, even if it is not
completely objective and verifiable. - Financial accounting focuses on precision. Managerial accounting aids
decision makers by providing good estimates as soon as possible rather than
waiting for precise data at some later time. - Financial accounting is concerned with reporting for a company as a
whole. Managerial accounting focuses on segments of a company such as
product lines, sales territories, divisions, and departments. - Financial accounting must conform to generally accepted accounting
principles (GAAP). Managerial accounting is not bound by GAAP. - Financial accounting is mandatory because outside parties such as the
Securities and Exchange Commission and tax authorities require periodic
financial statements. Managerial accounting is not mandatory.
Sheet1
| Financial Accounting | Managerial Accounting | ||
| 1. Users | External persons who | Managers who plan for | |
| make financial decisions | and control an organization | ||
| 2. Time focus | Historical perspective | Future emphasis | |
| 3. Verifiability | Emphasis on | Emphasis on relevance | |
| versus relevance | verifiability | for planning and control | |
| 4. Precision versus | Emphasis on | Emphasis on | |
| timeliness | precision | timeliness | |
| 5. Subject | Primary focus is on | Focuses on segments | |
| the whole organization | of an organization | ||
| 6. GAAP | Must follow GAAP | Need not follow GAAP | |
| and prescribed formats | or any prescribed format | ||
| 7. Requirement | Mandatory for | Not | |
| external reports | Mandatory |
Why should everyone in business understand cost accounting??
- Need to know
- What it costs to do things
- How to price your product
- If you can survive long enough to develop your market share
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The basics of cost accounting
- Lots of guessing about the future
- Costs
- Selling prices
- Volume
- Timing
- Performance evaluation
- Comparing guesses to actual
No money in
your future
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The Product
Manufacturing Costs
Direct
Materials
Direct
Labor
Manufacturing
Overhead
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Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. These costs are incurred to make a product.
Direct Materials
Raw materials that become an integral part of the product and that can be conveniently traced directly to it.
Example: A radio installed in an automobile
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Direct materials are raw materials that become an integral part of the finished product and that can be physically and conveniently traced to it.
Examples include the aircraft engines on a Boeing 777, the Intel processing chip in a personal computer, the blank video cassette in a pre-recorded video, and a radio in an automobile.
Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers
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Direct labor consists of that portion of labor cost that can be easily traced to a product. Direct labor is sometimes referred to as “touch labor” since it consists of the costs of workers who “touch” the product as it is being made.
Manufacturing costs that cannot be traced directly to specific units produced.
Manufacturing Overhead
Examples: Indirect labor and indirect materials
Wages paid to employees who are not directly involved in production work.
Examples: maintenance workers, janitors and security guards.
Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.
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Manufacturing overhead consists of all manufacturing costs other than direct materials and direct labor. These costs cannot be easily and conveniently traced to products. These costs are also called indirect manufacturing cost, factory overhead, and factory burden. Examples include miscellaneous supplies such as rivets in a Boeing 777; salaries for supervisors, janitors, and security guards; factory facility charges, etc.
Non-manufacturing (Period) Costs
Marketing or Selling Cost
Costs necessary to get the order and deliver the product.
Administrative Cost
All executive, organizational, and clerical costs.
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A manufacturing company incurs many other costs in addition to manufacturing costs. For financial reporting purposes most of these other costs are typically classified as marketing or selling costs and administrative costs. These costs are also called selling, general and administrative costs, or S, G, and A. Marketing and administrative costs are incurred in both manufacturing and merchandising firms.
Marketing costs include all costs necessary to secure customer orders and get the finished product into the hands of the customer. These costs are also referred to as order-getting and order-filling costs.
Administrative costs include all executive, organizational, and clerical costs associated with the general management of an organization that are not classified as production or marketing costs.
Primary Types of Cost Behavior
- Fixed
- Total costs do not change as the level of output changes (“output” is related to the activity base)
- Cost per unit decreases as “output” increases and visa-versa
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Examples of Fixed Costs
- Rent (?)
- Depreciation (?)
- Insurance (?)
- Many salaries and perhaps wages(?)
- Some forms of taxes/fees (?)
(?) = Means “it depends.”
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Advantages of Fixed Cost
- Average cost per unit falls as “output” increases
- Serves as a “hedge” against rising prices for the “fixed-cost item”
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Disadvantages of Fixed Cost
- Average cost per unit increases as output falls
- If market prices of the “fixed-cost item” decrease, it may be difficult to remain price-competitive
- Generally hard to “get out”
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Examples
Advertising and Research and Development
Examples
Depreciation on Equipment and Real Estate Taxes
Types of Fixed Costs
Discretionary
May be altered in the short-term by current managerial decisions
Committed
Long-term, cannot be significantly reduced in the short term.
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Part I
One type of fixed cost is known as committed fixed costs. These are long-term fixed costs that cannot be significantly reduced in the short term. Some examples include depreciation on manufacturing facilities and real estate taxes on factory property.
Part II
Another type of fixed cost is known as discretionary fixed costs. These types of fixed costs may be altered in the short-term by current management decisions. Some examples of discretionary fixed costs include advertising and research and development costs.
Warning – Warning--Warning
- Depreciation is an Accounting Number
- Not a cash flow number
- You really want to know
- How much the equipment costs
- When you have to pay for it
- How long it will last
- Is there salvage value
- What does it do for you – cash flow wise
- See capital budgeting discussion next class.
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Primary Types of Cost Behavior
- Variable
- Total costs change in proportion to the change in “output”
- Cost per unit does not change as “output” changes
- This of course ignores volume pricing issues
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Examples of Variable Costs
- Cost for inventory for a merchandising entity
- Cost of materials in a manufacturing entity
- Wages cost (?)
- Utilities cost (?)
- Food cost for an airline
(?) = Means “it depends.”
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Advantages of Variable Cost
- Costs can be reduced more easily if “output” falls
- Easier to take advantage of falling production cost
- Profit will be more directly related to “output” (this could also be a disadvantage)
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Disadvantages of Variable Cost
- Miss some opportunities for “economies of scale”
- Cannot avoid rising prices as with fixed cost
- Some companies use hedging contracts
- Variable cost may not be as variable as assumed
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The Trend Toward Fixed Costs
The trend in many industries is toward greater fixed costs relative to variable costs.
As machines take over
many mundane tasks
previously performed
by humans,
“knowledge workers”
are demanded for
their minds rather
than their muscles
Knowledge workers
tend to be salaried,
highly-trained and
difficult to replace. The
cost to compensate
these valued employees
is relatively fixed
rather than variable.
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Part I
In many industries we see a trend toward greater fixed costs relative to variable costs. In the past fifteen years we have seen computers and robotics take over many mundane tasks previously performed by humans. In today’s world economy, knowledge workers are in demand for their experience and knowledge rather than their muscle.
Part II
Most knowledge workers tend to be salaried, highly trained and very difficult to replace. The cost of these valued employees tends to be fixed rather than variable.
Recap of Types of Cost Behavior Patterns
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Finally, fixed cost per unit decreases as activity level goes up.
Sheet1
| Summary of Variable and Fixed Cost Behavior | ||||
| Cost | In Total | Per Unit | ||
| Variable | Total variable cost is | Variable cost per unit remains | ||
| proportional to the activity | the same over wide ranges | |||
| level within the relevant range. | of activity. | |||
| Total fixed cost remains the | ||||
| same even when the activity | Fixed cost per unit goes | |||
| Fixed | level changes within the | down as activity level goes up. | ||
| relevant range. |
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Primary Types of Cost Behavior
- Mixed Costs
- A basic cost per period
- Plus a “per unit” component
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Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
Total Utility Cost
A mixed cost has both fixed and variable
components. Consider the example of utility cost.
Mixed Costs
Total mixed cost
X
Y
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A mixed cost has both a fixed and variable element.
If you pay your utility bill, you know that a portion of your total bill is fixed. This is the standard monthly utility charge. The variable portion of your utility costs depends upon the number of kilowatt hours you consume. Your total utility bill has both a fixed and variable element.
The graph demonstrates the nature of a normal utility bill.
Contribution Margin
- Contribution margin (CM):
- Revenue - Variable Costs
- the amount of “new revenue” that is being “contributed” to cover fixed costs
- Usefulness of CM
- focuses attention on the change in earnings that result from a change in sales
- focuses attention on the change in earnings that result from a change in a company’s cost structure
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The Contribution Format
The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.
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The contribution approach provides an income statement format geared directly to cost behavior, which has been the focus of this chapter. This approach separates costs into fixed and variable. Sales minus variable costs equals contribution margin. The contribution margin minus fixed costs equals net operating income.
Sheet1
| Total | Unit | |||||
| Sales Revenue | $ 100,000 | $ 50 | ||||
| Less: Variable costs | 60,000 | 30 | ||||
| Contribution margin | $ 40,000 | $ 20 | ||||
| Less: Fixed costs | 30,000 | |||||
| Net operating income | $ 10,000 |
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Steps in job costing
- Brain storm
- Identify everything you will need
- Determine prices
- Adjust for shrinkage
- Separate into fixed and variable
- Determine VC per unit
- Guess how many units you will sell
- Determine FC per unit
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Figure out a selling price
- VC per unit + FC per unit + profit
- What does this price do to demand?
- Do I need to adjust FC per unit?
- What does marketing say about price?
- With this cost structure, how many units do I need to breakeven?
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Calculate Break Even
- How many units do I need to sell to cover my fixed cost?
- Example
- CM per unit = $200
- FC = $80,000
- I need to sell 400 units to break even.
- Can I sell more than that?
- If no, rework costs or abandon project.
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The Contribution Approach
If Racing sells 400 units in a month, it will be operating at the break-even point.
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If Racing sells 400 units a month, it will be operating at the break-even point. If Racing sells one more bike (401 bikes), net operating income will increase by $200.
Not capital budgeting yet
- At this point we have not covered the extra steps involved in buying equipment. We’ll do that next class.
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Let’s try to apply the steps
- You want to operate a kiosk that will only sell shots of espresso coffee.
- You will rent all facilities and equipment.
- What kind of costs would you incur?
- After we finish this step together, I’ll give you some numbers to use for the other steps.
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Brainstorming session
Our limited service kiosk
- License -- $500
- Rent of space -- $3,500
- Rent of equipment -- $1,240
- Cost of coffee $9 per lb
- Assume one cup per ounce
- Assume 5% shrinkage
- Cost of cups $9 for 160 cups
- Assume 5% shrinkage
- Demand 4,000 cups per year
- Not price sensitive
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A reminder of the steps left
- Determine price for each component
- Adjust for shrinkage
- Separate into fixed and variable
- Determine VC per unit
- Guess how many units you will sell
- Use 5,000 cups
- Determine FC per unit at 5,000 cups
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Once you have your costs
- Calculate selling price
- VC per unit + FC per unit + profit
- In this example we’ll just double the total cost per unit to get selling price
- We’ll skip all of the important real world issues with setting selling prices and their impact on demand. IMPORTANT STUFF!
- Calculate Break even
- Fixed costs / CM per unit
- CM = S - VC
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The template for your answer
| Units = 5,000 | |
| Total | Per Unit |
| Sales | |
| -VC | |
| CM | |
| -FC | |
| NI |
What happens if units are only 4,000?
| Units = 4,000 | ||
| Total | Per Unit | |
| Sales | ||
| -VC | This changes | Stays the same |
| CM | ||
| -FC | Stays the same | This changes |
| NI |
We will talk about your answer next class
- What you actually calculated.
- How sensitive are your results to major changes in prices?
- Anyone got a crystal ball handy?
- How useful is your fixed cost per unit if
- you can really only sale 4,000 cups?
- Your real market is 8,000 cups?
Do we have any time left?
- If we do we will talk more about budgeting
- Rest of slides provide some overview of other accounting related topics.
- There is a lot of information out there if you want to know more.
Planning and Control Cycle
Decision
Making
Formulating long-and short-term plans (Planning)
Measuring
performance (Controlling)
Implementing
plans (Directing and Motivating)
Comparing actual
to planned performance (Controlling)
Begin
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The work of management is summarized in the planning and control cycle shown on your screen. The process is a continuous loop in many organizations. Once plans are made, they are implemented. The controlling process starts with measuring actual performance and then comparing those results with planned performance. Corrective action may be necessary if actual results differ significantly from the plan. In some cases, new information may result in altering the plan before the cycle is repeated. Note that decision making is involved in all management activities.
Planning and Control
Planning -- involves developing objectives and preparing various budgets to achieve these objectives.
Control –
involves the steps taken by management that attempt to ensure the objectives are attained.
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Purposes of Budgeting Systems
Budget
a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.
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Advantages of Budgeting
Advantages
Define goal
and objectives
Uncover potential
bottlenecks
Coordinate
activities
Communicating
plans
Think about and
plan for the future
Means of allocating
resources
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Human Factors in Budgeting
The success of budgeting depends upon:
The degree to which top management accepts the budget program as a vital part of the company’s activities.
The way in which top management uses budgeted data.
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Cost Management Systems
Measure the cost of resources consumed.
Identify and eliminate non-value-added costs.
Determine efficiency and effectiveness of major activities.
Identify and evaluate new activities that can improve performance.
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Controlling Costs
Standard
performance
level
Actual
performance
level
Comparison between
standard and actual
performance
level
Cost
variance
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Standard Costs
Benchmarks for
measuring performance.
The expected level
of performance.
Based on carefully
predetermined amounts.
Used for planning labor
and material requirements.
Standard
Costs are
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Setting Standards
Analysis of
Historical Data
Task
Analysis
Cost
Standards
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Major Influences on
Pricing Decisions
Political, legal,
and image issues
Competitors
Pricing
Decisions
Costs
Customer
demand
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How Are Prices Set?
Prices are determined by the market, subject
to costs that must be covered in the long run.
Prices are based on costs, subject to
reactions of customers and competitors.
Market
Forces
Costs
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Why should everyone in business understand tax accounting??
- Taxes are a cost of doing business
- Tax planning can change results
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Tax Planning:
Evasion or Avoidance?
- Tax Evasion
Reducing tax liability by breaking the tax law
- Tax Avoidance
Minimizing tax bill within the terms of the tax law.
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Tax Concepts And Terminology A tax = tax base x tax rate
- Tax base determines
Who will pay the tax
How easy or hard it will be to collect
How burdensome the collection process is
- Tax rate(s) determines
The yield of the tax for a given base
How significant the vertical equity will be
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7
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7
After-Tax Cash Flows
The tax rate is 34%, so income taxes are
$525,000 × 34% = $178,500
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Sheet1
| High Country Department Stores | |||
| Income Statement | |||
| For the Year Ended June 30, 2005 | |||
| Revenue | $ 1,000,000 | ||
| Expenses | (475,000) | ||
| Income before taxes | $ 525,000 | ||
| Income taxes | (178,500) | ||
| Net income | $ 346,500 |
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Cash Revenues
High Country’s management is considering the purchase of equipment that will increase cash revenues by $110,000 and increase cash cost of goods sold by $60,000.
The company is subject to a tax rate of 34%.
Calculate the company’s after-tax cash flows.
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Cash Revenues
A short cut works like this:
Increase in income × ( 1 - tax rate)
$50,000 × ( 1 - .34) = $33,000
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Sheet1
| High Country Department Stores | |||
| After-Tax Cash Flows | |||
| Cash revenues | $ 110,000 | ||
| Cash cost of goods sold | (60,000) | ||
| Increase in income | $ 50,000 | ||
| Income taxes | (17,000) | ||
| After-tax cash flows | $ 33,000 |
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Non-cash deductions
- Not all tax deductions are tied to cash flows.
- Capital expenditures are recovered over time
- High Country’s proposal involved the purchase of equipment that cost $40,000
- Depreciated over five years
- using straight-line depreciation.
- Usually, one-half year depreciation is taken in the first year equipment is used.
- So it takes six years to recover the full cost.
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Noncash tax deductions
Here is a complete schedule of depreciation expense.
Note: there are faster ways to recover the $40,000.
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Sheet1
| Year | Depreciation Expense | Tax Rate | Reduced Tax Payment | |||||
| 1 | $ 4,000 | 34% | $ 1,360 | |||||
| 2 | 8,000 | 34% | 2,720 | |||||
| 3 | 8,000 | 34% | 2,720 | |||||
| 4 | 8,000 | 34% | 2,720 | |||||
| 5 | 8,000 | 34% | 2,720 | |||||
| 6 | 4,000 | 34% | 1,360 | |||||
| $ 40,000 | $ 13,600 |
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Noncash tax deductions
After tax benefit of the equipment.
Depreciation
Tax
Shield
*
Sheet1
| Year | Depreciation Expense | Tax Rate | Tax Savings | |||||
| 1 | $ 4,000 | 34% | $ 1,360 | |||||
| 2 | 8,000 | 34% | 2,720 | |||||
| 3 | 8,000 | 34% | 2,720 | |||||
| 4 | 8,000 | 34% | 2,720 | |||||
| 5 | 8,000 | 34% | 2,720 | |||||
| 5 | 4,000 | 34% | 1,360 | |||||
| $ 40,000 | $ 13,600 |
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Time Value of Money–
Preview of coming attractions.
Business investments extend over long periods of time, so we must recognize the time value of money.
Investments that promise returns earlier in time are preferable to those that promise returns later in time.
Tax deductions now are better than tax deductions later
*
The time value of money concept recognizes that a dollar today is worth more than a dollar a year from now. Therefore, projects that promise earlier returns are preferable to those that promise later returns.
Tax Obligations of an Employer
- Social Security and Medicare taxes
- Federal Unemployment Taxes (FUTA)
- Federal income tax withholding
- Employer’s share and withholding must be turned over to IRS quickly
- IRS will shut you down if too
delinquent
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15
Social Security and Medicare
(Employment taxes)
- Employer and Employee pay equal shares
- Employee’s share is withheld from pay
- Employer pays both halves to IRS
- 2012 rates
- employer: 6.2% on first $110,100 of wages
- employee: 4.2% on first $110,100 of wage
- 2013 rates
- employee/ employer-- 6.2% each
- on first $113,700 of included wages
Medicare, both: 1.45% on each included dollar
17
Federal Unemployment Taxes
- Provides payments to workers who have lost their jobs from state fund
- Employer only required to pay
- Base = $7,000 of wages per employee
- Rate = 6.2% of base
Reduced by credit for up to 5.4% of state unemployment tax paid
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18
Self employed person
- Essentially pays the same payroll taxes
- Except no FUTA
- Some of payroll taxes can be deducted on 1040.
*
Overview of Business Entities
- Type of entity determines
- The tax base
- The tax rates
*
3
3
What is a Business Entity?
- It “carries on” a trade or business
Has one or more associates
Has assets
Engages in some business activity
- Classification of entities:
Taxable
Conduit
Tax-exempt
*
4
Types of Taxpayers
- Individuals
- Corporations
C-Corps
S-Corps
- Trusts
- Partnerships
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19
19
19
Check the Box Rules: Tax Classification of Entity by Election
- Legal liability separate from tax treatment
- Form business under state law to get limited liability protection
- Elect tax entity type as a separate step unless
- Formed under articles of incorporation
- Then automatically a corporation
- Trust cannot be an association (corporation)
*
5
Entities Doing Business in U.S.
- By type
Sole proprietorships 73% (15.0 million)
C corporations 10% ( 2.0 million)
S corporations 9% ( 1.7 million)
Partnerships 8% ( 1.5 million)
- By size of net income
C corporations 64%
Sole proprietorships 27%
S corporations and partnerships 9%
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24
C Corporation
- Taxable entity
- Incorporated under the laws of a state
- Unincorporated association (e.g., LLC) that elects to be taxed as an “association”.
- Remember that liability issues (other than tax liability) are not controlled by type of tax entity as long as your lawyer does job correctly.
*
20
Pros and Cons of C Corp
PROS
- Continuity of life
- Centralized management
- Ease of Transfer
- Generous fringe benefits
CONS
- Double taxation of dividends
- Impact temporarily reduced by preference rate on qualified dividends
- Accumulated earnings tax
- Corporation taxed on distributions of appreciated property
- Tax costs to liquidation
*
13
Getting the Money Out
(You own the stock, not the assets.)
- Don’t
- Salaries and fringe benefits
- Dividends
- Interest payments
- Liquidation
*
15
Conduit Entity
- Nontaxable reporting entity
Partnership
S corporation
Some estates and trusts
- Income, deductions, etc., “flow through” to the tax returns of its owners
*
8
Partnership
- An organization composed of two or more entities that:
Carries on a trade or business, financial operation, or venture
Shares profits and losses among its owners
Is not a corporation, trust, or estate
- Co-ownership of property is not a partnership, unless significant services are provided
*
15
S Corporation
- Conduit entity like a partnership
- Less flexible than partnership
- Limitations
- Must be a domestic (US) corporation
- Only one class of stock allowed.
- No more than 100 shareholders.
- Only individuals, estates, and some trusts
- Not partnerships, nonresident aliens, certain trusts
- Special election required
*
21
Financial AccountingManagerial Accounting
1. UsersExternal persons whoManagers who plan for
make financial decisionsand control an organization
2. Time focusHistorical perspectiveFuture emphasis
3. VerifiabilityEmphasis onEmphasis on relevance
versus relevanceverifiabilityfor planning and control
4. Precision versusEmphasis on Emphasis on
timelinessprecisiontimeliness
5. SubjectPrimary focus is onFocuses on segments
the whole organizationof an organization
6. GAAP Must follow GAAPNeed not follow GAAP
and prescribed formatsor any prescribed format
7. RequirementMandatory forNot
external reportsMandatory
Summary of Variable and Fixed Cost Behavior
CostIn TotalPer Unit
VariableTotal variable cost isVariable cost per unit remains
proportional to the activitythe same over wide ranges
level within the relevant range.of activity.
Total fixed cost remains the
same even when the activityFixed cost per unit goes
Fixedlevel changes within thedown as activity level goes up.
relevant range.
TotalUnit
Sales Revenue100,000$ 50$
Less: Variable costs60,000 30
Contribution margin40,000$ 20$
Less: Fixed costs30,000
Net operating income10,000$
High Country Department Stores
For the Year Ended June 30, 2005
Revenue1,000,000$
Expenses(475,000)
Income before taxes525,000$
Income taxes(178,500)
Net income346,500$
Income Statement
Cash revenues110,000$
Cash cost of goods sold(60,000)
Increase in income50,000$
Income taxes(17,000)
After-tax cash flows33,000$
High Country Department Stores
After-Tax Cash Flows
Year
Depreciation
ExpenseTax Rate
Reduced
Tax
Payment
14,000$ 34%1,360$
28,000 34%2,720
38,000 34%2,720
48,000 34%2,720
58,000 34%2,720
64,000 34%1,360
40,000$ 13,600$
Year
Depreciation
Expense
Tax RateTax Savings
14,000$ 34%1,360$
28,000 34%2,720
38,000 34%2,720
48,000 34%2,720
58,000 34%2,720
54,000 34%1,360
40,000$ 13,600$
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