Question

Len Corp. reported net sales of $300 million last year and generated a net income of $66.00 million. Last year’s accounts receivable increased by $29 million. What is the maximum amount of cash that Len Corp. received from sales last year?

Answer 1

Answer:

Len Corp. received a maximum of $37 million of cash from sales.

Explanation:

The cash flow of a company is determined as follows: Net Income plus Depreciations plus/minus uses of cash.

• The net income is the amount of cash obtained from sales, less all the costs and expenses needed in order to obtain those sales;
• The depreciations don't represent an exit of cash, they are just an accounting adjust, so we have to add that amount to the net income;
• The uses of cash are all the operations in assets and liabilities that requires or generates cash. Since accounts receivable have been increased by $29 million, from the $300 million of sales you have $29 million you're going to receive next year. So we have to subtract those $29 million from the $66 million, and the result is $37 million.