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Cash Flow and Depreciation

In a small pizza shop, the owner has purchased his restaurant equipment and delivery cars with cash. He has noticed that expenses for utilities and supplies have been rather constant. On his projected income statement, he has 148,960 in fixed costs that includes $16,000 depreciation of delivery equipment, and $8,000 depreciation of restaurant equipment. His variable costs are $92,400, sales $308,000 and net income of $46,648.

a. briefly explain why his profits have increased at a faster rate than his sales.

b. briefly explain why his cash flow will exceed his profits.

I think that both of these questions are due to the depreciation costs being applied to the equipment that he has paid cash for, but I am not sure.

Solution Preview

a. briefly explain why his profits have increased at a faster rate than his sales.

His profits will increase at a faster rate than his sales because in the future his fixed expenses will go down ...

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