Question

Suppose your firm receives a million order on the last day of the year. You fill the order with million worth of inventory. The customer picks up the entire order the same day and pays million up front in​ cash; you also issue a bill for the customer to pay the remaining balance of million within 40 days. Suppose your​ firm's tax rate is ​(i.e., ignore​ taxes). Determine the consequences of this transaction for each of the​ following:
a. Revenues
b. Earnings
c. Receivables

Answer 1

Answer:

a. Revenues - These will increase by $5 million to represent the entire value of the order.

b. Earnings. - Increase by $3 million

Earnings in this case are revenue less the cost of inventory which will be;

= 5 - 2

= $3 million

c. Receivables - Increase by $4 million

The customer paid $1 million upfront which means that they still owe $4 million out of the $5 million. This will go to the receivables account to show that the customer owes the business.