A firm's operating cash flow is overstated by 90. Its non-cash expenses were correctly stated, noncash revenues were overstated by 55 and a total of 35 went into reducing outstanding current debt. The firm's tax rate is 40%. Then, the firm's net income is ________.
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A. B. C. D.D
operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts
To determine the firm's net income based on the given information, let's break down the different components:
Overstatement of operating cash flow by 90: This means that the reported operating cash flow is higher by 90 than its actual value. Since net income is a component of operating cash flow, an overstatement of operating cash flow would result in an overstatement of net income as well.
Non-cash revenues overstated by 55: Non-cash revenues are revenues that do not involve actual cash inflows. If non-cash revenues are overstated, it means that the reported revenues are higher than their actual value. Since revenues are a component of net income, an overstatement of non-cash revenues would lead to an overstatement of net income.
Correctly stated non-cash expenses: Non-cash expenses are expenses that do not involve actual cash outflows. Since they are correctly stated, they will not have any impact on the calculation of net income.
Reduction of outstanding current debt by 35: When debt is reduced, it does not directly affect net income. However, it can have an indirect impact by reducing interest expenses, which could lead to higher net income. However, no information is provided about the interest expenses, so we cannot determine the impact on net income in this case.
Tax rate of 40%: The tax rate indicates the percentage of taxable income that will be paid as taxes. Net income is subject to taxes, so the firm's net income will be reduced by 40% due to taxes.
Based on the information provided, we can conclude that the firm's net income is overstated by 90 (due to the overstatement of operating cash flow) and overstated by 55 (due to the overstatement of non-cash revenues). Therefore, the total overstatement of net income is 90 + 55 = 145.
However, the question asks for the firm's net income, not the overstatement. To determine the actual net income, we need to subtract the total overstatement from the reported net income. Since the net income is overstated by 145, the correct net income would be lower than the reported net income by 145. Therefore, the firm's net income is understated by 145.
Among the given answer choices, the correct answer is C. understated by 55.