Question

V P 1-2 Mccrual income versus cash flow for a period Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a pro- Viso thar they must be paid for within 30 days but can be returned for a full refund credit within 90 days. In 2014, Thomas shipped and billed book titles totaling $760,000. Collections, net of return credits, during the year totaled 5690,000. The company spent $300,000 acquiring the books that it shipped. 1. Using accrual accounting and the preceding values, show the firm's net profit for the past year. b. Using cash accounting and the preceding values, show the firm's net cash flow for the past year. c. Which of these statements is more useful to the financial manager? Why? P1-3 Personal Finance Problem Cash flows It is typical for Jane to plan, monitor, and assess her financial position using cash flows over a given period, typically a month. Jane has a savings account, and her bank loans money at 6 percent per year while it offers short-term investment rates of 5 percent. Jane's cash flows during August were as follows: Ieem Cash inflow Cash outflow -$1,000 Clothes 5 450 --500 -800 Interest received Dining out Groceries Salary Auto payment Utilities Mortgage 4,500 -355 -280 -1,200 -222 Gas V a. Determine Jane's total cash inflows and cash outflows. b. Determine the net cash flow for the month of August. c. If there is a shortage, what are a few options open to Jane? d. If there is a surplus, what would be a prudent strategy for her to follow? P1-A Marginal cost-benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $560,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in today's dollars) over that same time period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following: a. The marginal (added) benefits of the proposed new robotics. b. The marginal (added) cost of the proposed new robotics. c. The net benefit of the proposed new robotics. d. What should Ken recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made)

Answer 1

a. Accrual Method

Income Statement
Sales Revenue	$          760,000
Cost of Sales	$          300,000
Income	$          460,000

b.

Cash Collected from Customers	$          690,000
Cash paid for books	$          300,000
Cash flow from Operating Incomes	$          390,000

c. Income statement as per accrual accounting is more useful to financial manager to assess the income company is earning for the sales made whether collected in cash or not. Since sales are made, therefore income from same should be assessed at that time.

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