Houston's is considering a project that will produce incremental annual sales of $361,000 and increase cash expenses by $198,000. If the project is implemented, taxes will increase from $31,000 to $47,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach?
A) $172,000
B) $147,000
C) $122,000
D) $138,000
E) $163,000

Question

Quizplus · Accepted Answer

The top-down approach to calculating operating cash flow is:

Operating Cash Flow = EBIT + Depreciation - Taxes

To calculate EBIT (earnings before interest and taxes), we need to subtract the incremental cash expenses from the incremental sales:

EBIT = Incremental Sales - Incremental Expenses
EBIT = $361,000 - $198,000
EBIT = $163,000

Next, we need to calculate depreciation. Since no information was given about any new assets being purchased for the project, we assume no depreciation expense:

Depreciation = 0

Finally, we can calculate the operating cash flow:

Operating Cash Flow = EBIT + Depreciation - Taxes
Operating Cash Flow = $163,000 + 0 - ($47,000 - $31,000)
Operating Cash Flow = $163,000 - $16,000
Operating Cash Flow = $147,000

Therefore, the best answer is B.

Houston's Is Considering a Project That Will Produce Incremental Annual