Consider the following financial statement information for the Keenan Corporatio

Question

Consider the following financial statement information for the Keenan Corporation:

Item                                    Beginning                                     Ending
Inventory                              $9,582.00                                 $10,380.00
Accounts receivable               $4,851.00                                     5,381.00
Accounts payable                  $5,152.00                                    5,493.00
Net sales                                                    $138,503.00
Cost of goods sold                                        $86,313.00



Assume all sales are on credit. Calculate the operating and cash cycles.

Explanation / Answer

Hey There, I think that the answers you are looking for are to derive the Operating Cashflow using the info given. Operating Cashflow By Direct Method: Step 1: Cash Received by Customers = Net Sales - (Change in Accounts Receivable) = $138,503 - ($5,831 - $4,851) = $137,523 -The Reason that we calculate Cash Received by Customers this way is because we need to take into account that not all Sales occur for cash, some go to A/R and we need to account for that. Step 2: Cash Paid to Suppliers = COGS - (Change in Inventory) - (Change in A/P) = $86,313 - ($10,380 - $9,582) - ($5,493 - $5,152) = $85,174 -The Reason that we make this Calculation the way we do it is so that we can account for any inventory bought during the year as well as any inventory bought during the year on Account, as Cash DOES NOT flow out for Inventory paid on account. --Note: It IS okay if you end up ADDING (Change in Inventory) or (Change in A/P) as this is what will happen if you have either REDUCED your stock inventory or INCREASED your Accounts Payable during the year. With the information given, you can use those things to find out what cashflow from operating activities is: Step 3(Final Step): Cash Flow from Operating = Cash Received from Customers - Cash Paid to Suppliers = $137,523 - $85,174 In more Complex problems you'll have to account for cash paid for more things, here's some more formulas that will help for those accounts as they come up: Cash payments for operating expenses = operating expenses + increase (or - decrease) in prepaid expenses + decrease (or - increase) in accrued liabilities Cash interest = interest expense - increase (or + decrease) interest payable + amortization of bond premium (or - discount) Cash payments for income taxes = income taxes + decrease (or - increase) in income taxes payable Read more: http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/cash-flow-direct.asp#ixzz1mhKxRs4L Hope that Helped out!

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