10 cans are sold each period at $10 per can, the cost of producing each can is $
ID: 2568225 • Letter: 1
Question
10 cans are sold each period at $10 per can, the cost of producing each can is $6, there is no depreciation, the tax rate is 35%, and inventory is valued at cost.
We want to calculate the cash flow in period 10. The projects balance sheet at the end of period 9 is given by:
Assets:
Fixed Assets: 0
Current Assets: 100
Accounts Receivable: 46
Inventory: 54
Liabilities:
Shareholders Equity: 20
Current Liabilities: 80
Accounts Payable: 80
Assume all revenues and costs incurred in period 10 are paid in cash.
Find the cash flow in period 10 for each of the following cases. Do this in two ways: (1) as Cash Received – Cash paid and (2) As Net Income – Change in Net Working Capital
A. The people who owed us money from last period pay us $40 of the amount they owed
B. In addition to costs in period 10, we pay our suppliers $20 of the amount we owe them from period 9
C. We produce 8 cans but we sell 10
Explanation / Answer
Answer a. Cash Inflow: Sale Revenue - 10 Cans X $10 100 Cash recd. From Customers 40 140 Cash Outflow: Cost of Production of Can - 8 Cans X $6 48 Payment to Suppliers 20 Tax Paid 14 82 Net Change in Cash Flow 58 Answer b. Calculation of Net Income Sales Revenue - 10 Cans X $10 100 Less: Cost of Cans - 10 Cans X $6 60 Gross Margin 40 Less: Expenses - Net Opertating Income 40 Less: Income Tax - 35% 14 Net Income 26 Calculation of Cash Flow: Net Income 26 Change in Working Capital Decrease in Accounts Receivable 40 Decrease in Inventory 12 Decrease in Accounts Payable (20) 32 Cash Inflow From Operation 58 Beg. Bal. End. Bal Accounts Receivable 46 6 Inventory 54 42 Accounts Payable 80 60
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