Question

During the year, The Train Stop decreased its accounts receivable by $60, increased its inventory by $130, and decreased its accounts payable by $20.

Q1: What is the net result of Train Stop’s cash balance from these transactions? Explain by showing the method

Q2: What is the effect of the changes affect Train’s Stop’s liquidity? Explain

Answer 1

1. Impact of the transactions on cash balance under indirect method:

A) Decrease in accounts receivable = $60

B) Increase in inventory = ($130)

C) Decrease in accounts payable = ($20)

Net impact on cash balance = ($90)

Hence cash Balance would reduce by $90 due to the above transaction as per indirect method

2.

Increase in inventory indicates that the inventory turnover ratio is increasing which is not a good sign for a business organization. It indicates that the purchase and sale are not properly managed I.e high purchase but no high sales leading to increased inventory. Also when inventory is increased, the funds are blocked into stock and it reduces the liquidity in the organization.

Decrease in accounts receivable and decrease in accounts payable by $60 and $20 each indicate an increase in liquidity by $40 (net off)

Increase in inventory reduces the liquidity of the concern while net decrease in accounts receivable and payable increases the liquidity.

Thanks