Question

Suppose your firm receives a

$4.33

million order on the last day of the year. You fill the order with

$2.11

million worth of inventory. The customer picks up the entire order the same day and pays

$1.02

million up front in​ cash; you also issue a bill for the customer to pay the remaining balance of

$3.31

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

Answer 1

~Sales (Revenue) of the order = $4.33 million

~ The order is filled with inventory worth $2.11 million (cost). Therefore, profit on the order = $4.33 - $2.11 = $2.22 million.

~ For the total sales of $4.33 million, the customer paid $1.02 upfront cash, and the bill for remaining $3.31 is also issued on the last day of the year. Therefore, full sales of $4.33 million is booked for : $1.02 in cash, and $3.31 in trade receivables.

Therefore, ANSWERS:

a. Revenues:

Revenue will increase by $4.33 million.

b. Earnings:

Earnings will increase by $2.22 million.

c. Receivables:

Receivables will increase by $3.31 million.