During the year, the Senbet Discount Tire Company had gross sales of $1.14 million. The firm’s cost of goods sold and selling expenses were $533,000 and $223,000, respectively. The firm also had notes payable of $880,000. These notes carried an interest rate of 7 percent. Depreciation was $138,000. The firm’s tax rate was 35 percent. What was the firm’s operating cash flow?

the firm’s operating cash flow is $522,000.

Explanation:

It is important to understand that Operating Cash flow is different from Operating Profit.

Operating Cash flow involves the movement of cash.Whilst Operating Profit is the movement of Incomes and expenses.

The first step is to determine the Operating Profit then adjust it with the non-cash items included in it to reach Operating Cash flow amount.

Gross sales                      $1,140,000

Less cost of goods sold ($533,000)

Less selling expenses    ($223,000)

Operating Profit               $384,000

Then Adjust the Operating Profit  with non-cash items

Operating Profit               $384,000

Add Depreciation             $138,000

Operating Cash flow       $522,000

Note : Interest and tax expenses are not part of Operating Income as the arises out of secondary activities of the company.