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    The Menendez Corporation

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    3-7

    The Menendez Corporation expects to have sales of twelve million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash and costs other than depreciation must be paid off during the year. Menendez federal plus state tax rate is 40%

    a. Set up an income statement. What is Menendez expected net cash flow?
    b. Suppose congress changed the tax laws so the Menendez's deprecation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
    c. Now suppose that Congress instead of doubling the depreciation reduced it by 50%. How would profit and net cash flow be affected?
    d. If this were your company, would you prefer Congress to double your depreciation or cut it in half? Why?

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    Solution Preview

    3-7

    The Menendez Corporation expects to have sales of twelve million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash and costs other than depreciation must be paid off during the year. Menendez federal plus state tax rate is 40%

    a. Set up an income statement. What is Menendez expected net cash flow?

    Sales 12,000,000
    Less: Cost of Goods Sold (75%) 9,000,000
    Gross Profit 3,000,000
    Less: Depreciation Expense ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer the following questions: -

    a. Set up an income statement. What is Menendez expected net cash flow?
    b. Suppose congress changed the tax laws so the Menendez's deprecation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
    c. Now suppose that Congress instead of doubling the depreciation reduced it by 50%. How would profit and net cash flow be affected?
    d. If this were your company, would you prefer Congress to double your depreciation or cut it in half? Why?

    $2.19

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