Question

Candy Canes Inc. spends $100,000 to buy sugar and peppermint in April. It produces its candy and sells it to distributors in May for $150,000, but it does not receive payment until June. For each month, find the firm’s sales, net income, and net cash flow.

Answer 1

Answer:

April,

• Sales is zero
• Net income is zero
• Net cash flow is an outflow of $100,000 (used in the purchase of raw materials)

May,

• Sales is $150,000
• Net income is $500,00
• Net cash flow is zero

And in June;

• Sales is zero
• Net income is zero
• Net cash flow is an inflow of $150,000 (amount received from customers)

Explanation:

In April, the company purchased raw materials (Sugar and Peppermint) for $100,000. The entries posted are debit to Inventories and Credit to Cash account (both amounting to $100,000 each).

As such in April,

• Sales is zero
• Net income is zero
• Net cash flow is an outflow of $100,000 (used in the purchase of raw materials)

It produces its candy and sells it to distributors in May for $150,000, but it does not receive payment until June.

When the sale is made in May, the entries required is Debit accounts receivables $150,000 and Credit Sales revenue $150,000. Also, Debit cost of goods sold $100,000 and Credit Inventories $100,000.

Net income is the difference between sales and cost of sales.

As such in May,

• Sales is $150,000
• Net income is $500,00
• Net cash flow is zero

For June,

Payment for goods sold in May were received, entries posted are debit to cash account and a credit to accounts receivables (both balance sheet accounts), hence;

• Sales is zero
• Net income is zero
• Net cash flow is an inflow of $150,000 (amount received from customers)