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18 February, 15:14

If accounts receivable and inventories increased by $85,000 (total), accounts payable increased by $14,000, and depreciation added up to $64,000, what was the firm's net income?

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  1. 18 February, 15:16
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    We can't define the firm's net income without additional information as either (1) or (2):

    1) Revenues / all income, and all expenses

    2) Operating cash-flow together with interest expense, and tax rate

    Explanation:

    If we can have the operating cash-flow, then we can define EBIT (profit / earnings before tax and interest) as below:

    Operating cash-flow = EBIT + depreciation - increase of accounts receivable and inventories + increase of accounts payable.

    Assuming Operating cash-flow is $100,000 then we have:

    EBIT = $100,000 + $64,000 - $85,000 + $14,000 = $93,000

    Assuming the firm have no interest expense and tax rate is 35%, then net profit = EBIT * (1 - tax rate) = $93,000 * (1-35%) = $60,450
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