Question

The 2018 income statement for Carmen Co. showed that sales reve

nues were $150 and Cost

of goods sold were $90. The balance sheet for 2018 also showed

the following changes from

2017: A/R increased $40, inventor

ies increased $30, A/P increa

sed $65 whereas Accrued

Payables decreased $85.

a)

How much cash was collected from customers and how much cash wa

s used to purchase

inventories in 2018?

b)

If there are no other

items on the income statement, what would

be GAAP net income?

c)

If there are no other non-cash i

tems, what would be cash flow f

rom operating activities?

Explain why the last two

items are not identical.

Answer 1

(a) Cash collected from customers = Sales - Increase in A/R = $(150-40) = $110
Cost of purchase = CoGS + Increase in Inventory = $(90+30) =$120
Cash paid to suppliers = Cost of Purchase - Increase in A/P = $(120-65) = $55

(b) Sales Revenue = $ 150
Less: CoGS = $   (90)
Add: Changes in inventory = $ 30
Gross Profit = $ 90

(c) Net Income 90
Adjustments
Changes in A/R (40)
Cahnges in Inventories (30)
Changes in A/P 65
Changes in Acc. Payables (85)
(90)
Cash from operating activities 00

Accounts payable and accrued payables are not the same thing. Accounts payable are the dues towards the suppliers. It arises when the company buys materials from suppliers on credit.
Accrued payables are expenses due for a service or product enjoyed by the company but the payment is not made.