Question

A company with current-year sales of $4,500,000 and cost of goods sold of $3,248,000 reduced its inventory days from 119 days in the prior year to 115 days for the current year. Its receivable days slowed from 40 days to 43 days. What was the cash flow effect of these swing-factor efficiency changes

Answer 1

($1391.78)

Step-by-step explanation:

According to the problem, computation of the given data are as follows,

Sales = $4,500,000

COG sold = $3,248,000

First we calculate the amount receivable in both 40 and 43 days, then

Amount Receivable = Sale ( Receivable days ÷ 365)

Amount Receivable (40 days) = $4,500,000 ( 40 ÷ 365) = $493,150.68

Amount Receivable (43 days) = $4,500,000 ( 43 ÷ 365) = $530,136.99

So, change in receivables = $530,136.99 - $493,150.68

= $36,986.30

Now we calculate the inventory for both 119 and 115 days

Inventory = COG Sold ( Inventory Days ÷ 365)

Inventory (119 Days) = $3,248,000 ( 119 ÷ 365) = $1,058,936.99

Inventory (115 Days) = $3,248,000 ( 115 ÷ 365) = $1,023,342.47

So, change in inventory = $1,058,936.99-$1,023,342.47

= $35,594.51

So, we can calculate the cashflow effect by using following formula,

Cashflow change = Change in inventory - Change in receivables

By putting the value, we get

Cashflow change = $35,594.51 - $36,986.30

= ($1391.78) (Bracket denotes negative)