Brandywine Income Statement Is as Follows:
Brandywine Income Statement
Revenue
12,000,000
Expenses
9,000,000
Gross Profit
3,000,000
less
Depreciation Expense
Net Income
Brandywine's net income was $1.5 million. The total profit margin, which we will assume is the net margin, is 1.5 million / 12 million = 12.5%. The cash flow is $3,000,000. The cash flow is the net income + depreciation, so 1.5m + 1.5m = 3m.
If the depreciation expense doubled, the income statement would be as follows:
Brandywine Income Statement
Revenue
12,000,000
Expenses
Gross Profit
less
Depreciation Expense
Net Income
The net income would drop to zero, as would the profit margin. The cash flows, however, would remain unchanged at $3m. This is because the depreciation expense has doubled. In doing so, it is now $3m, and when this is subtracted from the gross profit, the remaining money (net income) is now zero. However, depreciation is not a...
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