[sacredtheory]

I’ve heard there are sporadic errors with some of the Wiley questions…is this one of them?

Sussex Company has budgeted its operations for February 2008. No change in inventory level during the month is planned. Selected data from estimated amounts are as follows:

Net loss $100,000
Increase in accounts payable 40,000
Depreciation expense 35,000
Decrease in gross amounts of trade accounts receivable 60,000
Purchase of office equipment on 45-day credit terms 15,000
Provision for estimated warranty liability 10,000

How much change in cash position is expected for February?

A. $15,000 decrease.
B. $25,000 decrease.
C. $30,000 increase.
D. $45,000 increase.

Answer D is correct. One approach to the solution is to arrange the data in the format used for a cash from operations section of a statement of cash flows.

Net loss $(100,000)

Add: Expenses not requiring cash:
Depreciation $35,000
Warranty expense 10,000 45,000

Changes in AR and AP:
Decrease in AR $60,000
Increase in AP 40,000 100,000

Change in cash position from operations $ 5,000

The purchase of office equipment will not affect cash during February.

Say what?

 

 

BEC: Passed
AUD: Passed
REG: Passed
FAR: Passed

Jared

[ToCPA2011]

Purchasing Equip. is Investment cash flow. If the correct answer is D, i think the question is asking for operation cash flow only. The question is not very clear. My guess is to add back AP, AR, Depr, and Provision to Net loss and end up with $45k increase.

[rknight21]

I believe this question is without error.

Step 1: Add back non-cash item to net income or in this case net loss. Therefore (100,000) + $35,000 + $10,000 = ($55,000)

Step 2 Add Inflow of cash. ($55,000) + $60,000 + $40,000 = $45,000

Purchase of equipment is on credit. It doesn't affect cash….

[sacredtheory]

I see…thanks guys. It didn't even occur to me to add in the non-cash items to net income (loss). That's where I went wrong.

BEC: Passed
AUD: Passed
REG: Passed
FAR: Passed

Jared

[Anonymous]

@rknight21 – I understand your calculations but where is the Change in Cash Position of Operations of $5,000 coming from?

[Author]

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