Rotorua Products, Ltd., of New Zealand markets agricultural products for the bur
ID: 2428387 • Letter: R
Question
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The company's current assets, and current liabilities,and sales have been reported as follows over the last five years (Year 5 is the most recent year):
Year 5 Year 4 Year 3 Year 2 Year 1
Sales
$NZ 2,250,000
$NZ 2,160,000
$NZ 2,070,000
$NZ 1,980,000
$NZ 1,800,000
Cash $NZ 30,000 $NZ 40,000 $NZ 48,000 $NZ 65,000 $NZ 50,000
Accounts receivable, net 570,000 510,000 405,000 345,000 300,000
Inventory
750,000
720,000
690,000
660,000
600,000
Total current assets
$NZ 1,350,000
$NZ 1,270,000
$NZ 1,143,000
$NZ 1,070,000
$NZ 950,000
Current liabilities
$NZ 640,000
$NZ 580,000
$NZ 520,000
$NZ 440,000
$NZ 400,000
Which of the following statement(s) is true? (Select all that apply.)
The increase in current liabilities is directly related to the buildup in accounts receivable.
The sales are increasing at a steady rate.
The decline in cash is due to the growth in both inventories and accounts receivable.
The decline in cash does not reflect delays in collecting receivables.
Explanation / Answer
Answer: Only the third(3) option is true.
Let us see why 3rd option only true and why the others are not . Let us start with option 1.
Option(1): The increase in current liabilities is directly related to the build up in accounts receivable.
Justification: The increase in current liabilities is no way directly related to the build up in accounts receivable.Current liabilities will not increase with increase in the accounts receivable since current liabilities are not related to the accounts receivable.If the accounts receivable of a concern increases, then the cash position of the concern will decrease, but it will not leads to the increase in the current liabilities.
Option(2): The sales are increasing at a steady rate.
Justification: Sales are not increasing at a steady rate.From the first year to the second year the sasles increased at a rate of 10%.But when it comes to the second year to the third year the sales rate decreased to 4.5% from 10%. here the sales decreased to 6%.and after that sales rate decreased from 4.5% to4.3% and then later it falls to 4.1% from 4.3%.So sales are not increasing at a steady rate.
Option(3): The decline in cash is due to the increase in both inventory and receivables.
Justification: The decline in demand leads to the decline in sales. The decline in sales leads to the increase in inventory.The increase in inventory leads to the decrease in income(revenue). That is how the increase in inventory leads to the decline in cash.
Account receivables arise when there is credit sales.The increase in the account receivables arises due to the increase in the credit sales.Obviously the cash position will decline due to the increase in the accounts receivable, since accounts receivables are involving the future cash inflows.
Option(4):The decline in cash does not reflect the delays in collecting receivables.
Justification: What happens when there is delays in collecting receivables ?
The delays in collecting receivables leads to the decline in the cash position.We can see that in the question it self.Let us see the question, in the 1st year cash is 50,000 when receivables are 300,00. In the 5th year cash position declined to 30,000 while receivables increased to 570,000.So obviously we can say that the decline in cash reflects the delays in collecting receivables.
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