Question

Value Added Inc. buys $1 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 $2 million in February. However, it will not collect payment on the sales until April.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

Answer:

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

net income = revenue - costs = $2,000,000 - $1,000,000 (only cost given) = $1,000,000

b. What is its net income in March?

$0, the company didn't sell anything during March

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

net working capital = current assets - current liabilities = $1,000,000 (inventory) - $1,000,000 (accounts payable) = $0

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

net working capital = current assets - current liabilities = $0

It changed accounts receivables for cash, they are both current assets.

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

$0, it didn't pay anything during January

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

$0, it didn't pay anything during February

g. What is the cash flow in March?

-$1,000,000 since it paid its accounts payable during March

h. What is the cash flow in April?

$2,000,000 since it collected its accounts receivables during April