During 2012, Merced Rafters Inc. had sales of $1,000,000; cost of goods sold $750,000; administrative and selling expenses of $100,000; depreciation expenses of $50,000, and interest expense of $30,000. Its tax rate is 35 percent. a. What is MRI’s net income for 2012?b. What is its operating cash flow?

$45,500; $95,500

Explanation:

(i) Gross profit:

= Sales - Cost of goods sold

= $1,000,000 - $750,000

= $250,000

Profit Before Tax:

= Gross profit - administrative and selling expenses - Depreciation expense - Interest expense

= $250,000 - $100,000 - $50,000 - $30,000

= $70,000

Net Income = Profit Before Tax - Taxes

                   = $70,000 - (70,000 × 0.35)

                   = $70,000 - $24,500

                   = $45,500

(ii) Operating cash flow:

= Net Income + Depreciation

= $45,500 + $50,000

= $95,500

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