Question

Value Added Inc. buys $4 million of sow's ears at the beginning of January but doesn't pay immediately. Instead, it agrees to pay the bill in March. It processes the ears into silk purses, which it sells for $5 million in February. However, it will not collect payment on the sales until April. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Enter your answers in thousands of dollars not in millions.)

a. What is the firm’s net income in February?

b. What is its net income in March?

c. What is the firm’s net new investment in working capital in January?

d. What is its net new investment in working capital in April?

e. What is the firm’s cash flow in January?

f. What is the firm’s cash flow in February?

g. What is the cash flow in March?

h. What is the cash flow in April?

Answer 1

As per rules I will answer the first 4 sub parts of the question

Cost of goods sold is recognized at the time the sale is made. Revenues are recognized when they are realized and earned, no matter when cash is received.

A: Net income in Feb= Sales- cost = $5 mm- $4mm = $1 million

B:Net Income in March = 0

C:Net new investment in working capital = - $4 million

(Since inventory is purchased in January the working capital is to be invested in January)

D: Net new investment in working capital = $5 million

(Since the accounts payable is received in April, the working capital is recovered)

answered by: anonymous