Question: Had revenues of $12 million in 2011.Expenses other than depreciation totaled 75%of revenues, and depreciation expense was $1.5 million.All revenues were collected in cash during the year and all expenses other than depreciation were paid in cash.
a) Construct Brandywine's 2011 income statement.
b)What were Brandywine's net income, total profit margin, and cash flow?
c) Now suppose the company changed its depreciation calculation procedures(still within GAAP) such that its description expense doubled. How would this change affect Brandywine's net income, total profit margin, and cash flow?
d)Suppose the change halved rather than doubled. What would be the impact on net income, total profit margin, and cash flow? Edit
Answer: Answer a)
Income Statement of Brandywine
Expenses (75% of Revenue)
Net Income = 1.5 million
Total Profit Margin= Profit Margin = Net Income / Revenue = Initial Profit Margin = 1.5 / 12 = 12.5%
Cash Flow- Depreciation is a non cash expense and does not have any impact on the cash flows of the company. Thus there will be no impact in the cash flow of the company, the cash flow of the company will be $3 million. Edit
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