Question

Wolverine, Inc. began operations on January 1 of the current year with a $12,000 cash balance. Forty percent of sales are collected in the month of sale; 60% are collected in the month following sale. Similarly, 20% of purchases are paid in the month of purchase, and 80% are paid in the month following purchase. This is jan and Feb.

	Jan	Feb
Sales	35000	55000
Purchases	30000	40000
Operating expense	7000	9000

If operating expenses are paid in the month incurred and include monthly depreciation charges of $2,500, determine the change in Wolverine's cash balance during February?

Answer 1

Cash collected from sales in February = 40% of February sales + 60% of January sales

= ($55,000 * 40%) + (35,000 * 60%)

= $22,000 + $21,000

= $43,000

Cash paid for purchases in February = 20% of February purchases + 80% of January purchases

= ($40,000 * 20%) + ($30,000 * 80%)

= $8,000 + $24,000

= $32,000

Cash paid for operating expense in February = $9,000 - $2,500 depreciation expense

= $6,500

Cash in cash balance during February = Cash collected from sales in February - Cash paid for purchases in February - Cash paid for operating expense in February

= $43,000 - $32,000 - $6,500

= $4,500