Question

Help me on the Finance assignment and please show me as an excel format.

Accrual income versus cash flow for a period Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a proviso that they must be paid for within 30 days but can be returned for a full refund credit within 90 days. In 2018, Thomas shipped and billed book titles totaling $760,000. Collections, net of return credits, during the year totaled $690,000. The company spent $300,000 acquiring the books it shipped.

1. Using accrual accounting and the preceding values, show the firm’s net profit for the past year.

2. Using cash accounting and the preceding values, show the firm’s net cash flow for the past year.

3. Which of these statements is more useful to the financial manager? Why?

Answer 1

Before we get into the questions, let's summarise the information we have.

• Sales for the year = $ 760,000
• Collections for the year = $ 690,000
• Cost of acquiring the books it shipped = $ 300,000

Part (a).
On accrual basis, Net profit = Sales for the year - Costs of acquiring the books = $ 760,000 - $ 300,000 = $ 460,000

Part (b).
Based on cash accounting, Net cash flow = Cash Inflow - Cash Outflow = Collections - Cost of acquisition = $ 690,000 - $ 300,000 = $ 390,000

Part (c).

From the perspective of finance manager, the cash flow statement is more useful because,

• Liquidity takes importance over accrual and a finance manager is more concerned with liquidity required for day to day operations
• Cash flow statement is a better indicator of the health of the business
• Cash flow statement identifies the money that will not be collected and hence not contribute towards shareholders' wealth