Suppose your firm receives a $ 4.62 million order on the last day of the year. Y

Question

Suppose your firm receives a $ 4.62 million order on the last day of the year. You fill the order with $ 1.79 million worth of inventory. The customer picks up the entire order the same day and pays $ 1.08 million up front in cash; you also issue a bill for the customer to pay the remaining balance of $ 3.54 million within 40 days. Suppose your firm's tax rate is 0 % (i.e., ignore taxes). Determine the consequences of this transaction for each of the following: a. Revenues b. Earnings c. Receivables d. Inventory e. Cash Please answer in million and round to two decimal places

Explanation / Answer

A firm can recognize revenue if all 4 conditions are meet - 1) Delivery of goods has taken place 2) Evidence of agreement exists 3) Price is fixed and determinable 4) Collectability is reasonably assured In our case transaction satisfy all the above condition. In our example firm can book revenue as well as cost . Below will be impact of this transaction a) Revenue will increase by $ 4.62 million as sales is complete. b) Earning = Revenue - cost of goods sold = 4.62million - 1.79million = $     2.83 c) Receivable = Only cast to the extent of $1.08 million has received rest of amount will increase receivable Receivable = 4.62million-1.08million $     3.54 d) Cash is only collected to the extent of $1.08millon. Increase in cash = $1.08 million

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