You are opening your own business and estimate the following expenses and revenu
ID: 2623547 • Letter: Y
Question
You are opening your own business and estimate the following expenses and revenues:
Year 1 Year 2 Year3
Revenues $900,000 $1,300,000 $1,100,000
Cost of goods sold $550,000 $800,000 $700,000
Accounts payable as a percentage of cost of goods sold
Explanation / Answer
Please find below the table.
Explanation:
Inventory, cash and accounts receivable are current assets while accounts payable and accrued expenses are current liabilities.
Inventory = 13% * next year cost of goods sold
Cash = 8% * next year sales
Accounts receivable = 15% * next year sales
Accounts payable = 11% * next year cost of goods sold
Accrued expenses = 9% * next year revenues
All of this becomes zero at year 3 as they are liquidated.
Net working capital required = current assets - current liabilities
Net incremental working capital investment (which is what is asked in the question) is difference between this year's working capital and last year's working capital. For example, for year 0, this is 137,000. For year 1, this is 198,000 - 137,000 = 61,000 and so on.
Hope this helped ! Let me know in case of any queries.
Year 0 Year 1 Year 2 Year 3 Revenues 900,000 1,300,000 1,100,000 Cost of goods sold 550,000 800,000 700,000 Inventory 71,500 104,000 91,000 0 Cash 72,000 104,000 88,000 0 Accounts receivable 135,000 195,000 165,000 0 Total current assets (A) 278,500 403,000 344,000 0 Accounts payable 60,500 88,000 77,000 0 Accrued expenses 81,000 117,000 99,000 0 Total current liabilities (B) 141,500 205,000 176,000 0 Net working capital required (A-B) 137,000 198,000 168,000 0 Net incremental working capital investment 137,000 61,000 -30,000 -168,000Related Questions
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