Question

QUESTION 1. A company's accounts receivable increased during the year by $6 million. What is the amount of cash the company received from customers during the reporting period if its sales were $50 million?

QUESTION 2. A company's inventory increased during the year by $7 million. Its accounts payable increased by 9 million during the same period. What is the amount of cash paid to suppliers of merchandise during the reporting period if its cost of goods sold was $35 million?

Answer 1

Answer to Question 1:

Cash collection from customer = Sales - Increase in accounts receivable balance

= $ 50 million - $ 6 milllion

= $ 44 million

Thus, Cash received from customer during reporting period is $ 44 million

Explanation:

Increase in accounts receivable balance by $ 6 million represents out of total sales, $ 6 million sales proceedings not received.

Answer to Question 2:

Cash paid to suppliers = Purchases - Increase in accounts payable balance

= $ 42 million - $ 9 million

= $ 33 million

Thus, Cash paid to suppliers of merchandise during reporting period is $ 33 million

Explanation:

Increase in accounts payable balance by $ 9 million represents out of total purchases, $ 9 million purchase payment not made yet.

Working Note:

Purchases are calculated as follows:

Cost of goods sold = Purchases - Increase in Invenotry

Thus,

Purchases = Cost of goods sold + Increase in Invenotry

= $ 35 million + $ 7 million

= $ 42 million

Derivation of formula "Cost of goods sold = Purchases - Increase in Invenotry" is s follows:

As we know,

Cost of goods sold = Beginning Inventory + Purchases - Ending Inventory

Let Beginning Inventory be A

Cost of goods sold = A + Purchases - ( A+ Ending Inventory )

One A has + sign & other has - Sign, thus Square off A.

Therefore, Cost of goods sold = Purchases - Ending Inventory