Question

Value Added Inc. Buy $ 21 million of Sow's ears at the beginning of January but doesn't pay immediately the bill in March it processes the ears into silk purses, which it sells for 22 million in February, however it will not collect payment on the sale until April. What is firm net income in February? What is the net income in March? What is the firm investment in working capital in January? What is the net new investment in working capital in April? What is the firm's cash flow in January,February? What is the cash flow in March, April/

Answer 1

Based on information given calculations are as below:

Answer 1:

Net income in February = Sales in February - Cost of goods sold = $22 million - $21 million = $1 million

Answer 2:

There are no sales made and expenses incurred in March

Hence:

Net Income in March = $0

Answer 3:

The company buys $ 21 million of material at the beginning of January but doesn't pay immediately and pays the bill in March

Working capital = Current assets - Current liabilities

Investment in working capital in January = Inventory - Accounts payable = $21 million - $21 million = $0

Answer 4:

Net new investment in working capital in April = $0

Answer 5 and 6:

Firm's cash flow:

January = $0

February = - $1 million

March = - $21 million

April = $22 million