ABC Corporation has the following information for the year:\begin{align*}\text{Net Sales} &= \$500,000 \\\text{Cost of Goods Sold} &= \$300,000 \\\text{Operating Expenses} &= \$100,000 \\\text{Depreciation Expense} &= \$20,000 \\\text{Interest Expense} &= \$10,000 \\\text{Income Tax Rate} &= 30\% \end{align*}What is the operating cash flow for ABC Corporation?

• A. \$70,000
• B. \$80,000
• C. \$98,000
• D. \$90,000

Answer: (C)

Verified step by step guidance

1. Step 1: Start by calculating the Operating Income (EBIT). Operating Income is calculated as Net Sales minus Cost of Goods Sold (COGS) and Operating Expenses. Use the formula: \( \text{Operating Income} = \text{Net Sales} - \text{COGS} - \text{Operating Expenses} \).
2. Step 2: Add back the Depreciation Expense to the Operating Income. Depreciation is a non-cash expense, so it is added back to calculate the Operating Cash Flow. Use the formula: \( \text{Adjusted Operating Income} = \text{Operating Income} + \text{Depreciation Expense} \).
3. Step 3: Subtract the Interest Expense from the Adjusted Operating Income to calculate the Earnings Before Tax (EBT). Use the formula: \( \text{EBT} = \text{Adjusted Operating Income} - \text{Interest Expense} \).
4. Step 4: Calculate the Income Tax Expense by applying the Income Tax Rate to the Earnings Before Tax (EBT). Use the formula: \( \text{Income Tax Expense} = \text{EBT} \times \text{Income Tax Rate} \).
5. Step 5: Subtract the Income Tax Expense from the Earnings Before Tax (EBT) to calculate the Operating Cash Flow. Use the formula: \( \text{Operating Cash Flow} = \text{EBT} - \text{Income Tax Expense} \).