Question

SHOW YOUR WORK, DO NOT USE EXCEL

Company A spends $100k on inventory in April. It produces its products and sells to consumers in May for $150k. Payment is received in June. For each month, find the firm’s sales, net income, and changes in NWC.

Answer 1

Hi,

Here IN May month cost on inventory = $100k

Sales =0

so IN April firm sales = 0

Net Income = Sales - cost

= 0- 100k =-$100k

nwc = current asset - current liability

since $100k spent on inventory hence current asset increased by $100k

but at the same time cash also decreased by $100k so net working remains the same.

HEnce change in NWC = 0

In May.

Sold to customer for $150k

so firm sales = $150k

net income = 150-0 = $150k

inventory reduced by 100k but account receivable increased by 150k

so change in NWC= 150-100 = $50k

IN June

Sales= 0

Net income =0

account receivable moved to cash

so change in NWC =0

Thanks