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# Ratios & Cash Flows

I am not understanding how to obtain the OCF. I know that you have to add the depreciation expense and subtract the tax, but I am very confused. I know that you must divide the current assets by the current liabilities but when I do it, it doesn't work. Please help.

Hammett, Inc., has sales of \$19,720, costs of \$9,310, depreciation expense of \$1,980, and interest expense of \$1,470. Assume the tax rate is 40 percent.

What is the operating cash flow?

Hammett, Inc., has net working capital of \$1,090, current liabilities of \$6,750, and inventory of \$1,160.

What is the current ratio? Round your answer to 2 decimal places (e.g., 3.16).
What is the quick ratio? Round your answer to 2 decimal places (e.g., 3.16).

#### Solution Preview

What is the operating cash flow?

-- The operating cash flow = earnings before interest and income taxes + depreciation
minus income taxes.

19720 - 9310 - 1980 - 1470 = 6960 x 40% = 2784. <-- this gives you their net income and income tax expense. The net income = sales - expenses - depreciation - interest expense. The total of sales ...

#### Solution Summary

This solution shows the student how to calculate operating cash flow, the current ratio, and the quick ratio based on the information given.

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