Question

You are the accounting manager of ABC Inc, which sells laptops. Your company has the following transactions for the month of December, 2019:

1. December 1^st: Ordered 10,000 laptops from Park Inc and paid cash of $200.
2. December 1^st: Bought a delivery truck from Arthur Motors Inc for $36,000. You estimate that this delivery truck can be used for anywhere between 12 to 36 months.
3. December 5^th: Spent $20 in cash on each laptop to package it.
4. Dec 10^th: Delivered 10,000 laptops for a price of $500 to Bata Inc. and received cash for the entire order.
5. December 20^th: Ordered 5,000 laptops from Park Inc. and paid cash of $250.
6. December 29^th: Received a call from Home Inc. saying that they want 5,000 ($500 each)laptops. Home Inc. said that they can receive delivery any time between December 30^th, 2019 and January 5^th, 2020. You also know that Home Inc. will only be able to pay in February, 2020 as it is going through financial trouble. A credit check allowed you to find out that Home Inc. will only be able to pay between 80 – 90% of the full amount.

Your CEO, Mrs. Hop, asks you to present her some accounting numbers by the end of day on December 31^st, 2019.

a) What is the highest value of net income you can report to her? (1.5 points)

b) What is the lowest value of net income you can report to her? (1.5 points)

c) What is the highest value of cash provided by operations you can report to her? (1.5 points)

d)What is the lowest value of cash provided by operations you can report to her? (1.5 points)

Please show the formula.

Answer 1

Situation I
When sale of 5000 laptops is considered within 31 December,2019
Date	Particulars	P&L	Cash	Remarks
10-Dec	Sale of 10,000 laptops	5,000,000	5,000,000
29-Dec	Sale of 5,000 laptops	2,500,000	-	(Assuming sale is within 31 December)
1-Dec	Purchase 10,000 laptops	(2,000,000)	(2,000,000)
1-Dec	Delivery truck purchase	-	-	(No cash payment is made)
1-Dec	Depreciation on delivery truck	(1,000)	-	(Assuming 3 years life and no salvage) (Depreciation 36000/3*12)
5-Dec	Laptop packaging	(300,000)	(300,000)	( 20 on 15,000 laptops)
20-Dec	Purchase 5,000 laptops	(1,250,000)	(1,250,000)
29-Dec	Bad debt	(250,000)	-	(Assuming 90% will be received on sale of 29 dec)
	Net amount	3,699,000	1,450,000
Situation II
When sale of 5000 laptops is considered after 31 December,2019
Date	Particulars	P&L	Cash	Remarks
10-Dec	Sale of 10,000 laptops	5,000,000	5,000,000
29-Dec	Sale of 5,000 laptops	-	-	(Assuming sale is after 31 December)
1-Dec	Purchase 10,000 laptops	(2,000,000)	(2,000,000)
1-Dec	Delivery truck purchase	-	-	(No cash payment is made)
1-Dec	Depreciation on delivery truck	(1,000)	-	(Assuming 3 years life and no salvage) (Depreciation 36000/3*12)
5-Dec	Laptop packaging	(200,000)	(200,000)	( 20 on 10,000 laptops sold). Assuming 5000 laptops will be packaged at the time of sale
20-Dec	Purchase 5,000 laptops	-	(1,250,000)	The same is stored in Inventory for further sale and will not form a part of COGS
29-Dec	Bad debt	-	-	(Assuming sale is after 31 December)
	Net amount	2,799,000	1,550,000
a	Highest value of net income	3,699,000	Refer Situation I
b	Lowest value of net income	2,799,000	Refer Situation II
c	Highest value of cash provided by operations	1,550,000	Refer Situation II
d	Lowest value of cash provided by operations	1,450,000	Refer Situation I
Further if it is assumed that all the laptops are packaged, then the cash provided by operations would be 1,550,000. This means cash generated will always
be same irrespective of net income generated.