Question

Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year’s accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year?

Answer 1

Solution :

The maximum amount of cash that Globo-Chem Co. received from sales last year is calculated as follows :

Maximum amount of cash received from sales = Net sales less Increase in Account receivables

As per the information given in the question we have

Net sales = $ 600 Million ; Increase in Account receivables = $ 17 Million

Thus applying the above information in the above equation we have

Maximum amount of cash received from sales = $ 600 Million - $ 17 Million

= $ 583 Million

Thus the maximum amount of cash that Globo-Chem Co. received from sales last year = $ 583 Million

Note : Increase in accounts receivable last year implies that the debtors are yet to pay for the $ 17 Million worth of sales made last year.

Thus the cash with respect to such sales has not yet been received by the company.

Hence, that part of sales ( which caused an increase in accounts receivable ) has been deducted from the Net sales figure to arrive at the Maximum amount of cash received from sales.