Question

Question 7 Simpson Ltd. (Simpson) imports novelty items from Asian manufacturers and sells them to retailers. The company began operations at the beginning of 2018. The following information is available about Simpson's operation: • Simpson's suppliers allow it 30 days to pay for purchases. Assume purchases are made evenly throughout the year. Simpson allows customers 60 days to pay for their purchases. Assume sales occur evenly throughout the year. • Simpson has a markup on its product of 100 percent. (if a customer purchases merchandise that costs Simpson $1 the customer pays $2.) Operating costs, other than the cost of product sold, are $135,000 per quarter. These costs are paid in cash during the quarter. Simpson began operations with $235,000 in cash contributed by its shareholders. • Quarterly information for 2018: 1st Quarter $290,000 2nd Quarter $320,000 3rd Quarter $380,000 4th Quarter $450,000 Total $1,440,000 Sales Inventory purchases $300,000 $140,000 $195,000 $250,000 $885,000 Required: a) Prepare income statements for each quarter of 2018 and for the entire year. (Hint: Use the fact that Simpson has a 100 percent markup to calculate cost of goods sold.) b) Calculate the amount of inventory on hand at the end of each quarter and the end of the year. c) Calculate the amount of accounts receivable at the end of each quarter and the end of the year. d) Calculate the amount of accounts payable at the end of each quarter and the end of the year. e) Calculate the amount of cash on hand at the end of each quarter and the end of the year. What was the net cash flow for each quarter and the year? 1) Explain the difference between net income and net cash flow during 2018. Evaluate Simpson's liquidity during 2018. What could be done to improve Simpson's liquidity? B) What would net income be if Simpson gave customers 30 days to pay? What would net cash flow be? Discuss your results compared with when customers had 60 days to pay. Are there any business issues to consider in using a 30 day instead of a 60 day collection period?

Parts E F AND G please

Answer 1

Refer the below images for the above mentioned questions, in a detailed way of solution.

solution: Simpson 1st Quarter and quarter 3rd Quarter 4the warter Toral paxtiwlars Sales $290000 $30000 135000 Inventory purchases other operating cost $320000 a 140000 135000 $380000 & 195600 135000 $ 1440000 $885000 $450000 $250000 135000 $5 40000 Sales $ 290000 $ 32.000 380000 145000 190000 cogs other Net income $ 4.000 225000 135000 890000 160000 135000 $ 25000 11440000 720000 540000 $ 180000 135000 135000 $S5 000 $10000 $ 155ooo $0 $135000 fo b) Beginning inventory 885000 purchase Booooo учі бро 5000 140000 1600D 135000 195000 190000 t40.00 sold 140000 250000 225000 165600 7200 165000 ende inventory $213333 $253333 $0 $ 193333 Beginning Accounts Receivable 4500 380000 1440000 320000 290000 96667 300000 340000 403333 4140000 Sales Cotechion Ending Accounts Decavable 193333 213333 253333 300000 300060 $ 46664 $65000 $0 $ 100 000 Beginning Account payable purchases payments Ending Accounts 300000 200000 140000 1933 195000 176667 61000 260000 888000 231667 801667 83333 87333 100 000 46667 Payable

ist Quarter particulars Beginning cash Collections payments Ending cash Change in Cash $ 235000 96667 335000 (3333) (238 333) and quarter 417313) 300000 328373 (31667) (26333) grauarter (91667) 340000 311667 (3333) 28333 4thouarter (3333) 403333 366667 33333 36567 total $ 235000 1140000 1341667 73333 (201667) Net income and net cash How are different because net income includes non a cash amounts such as gains / losses on the sale of assets, acesuals and depreciation for Simpson the difference is due to the initial expenditure of cash needed to get the business going (buildup of inventory) and the a simpson gives its customers to to pay while it has only 30 days to pay its suppliers. over the year simpson's Cash position has been a challenge. the company has been in a negative cash position for most of the year, meaning that the company has Overdraft protection (or) a line of credit from a bank that has allowed it to continue operations. As of the end of the year it has a small cash balance of $3333] which is significantly less than the amount it owes its suppliers. As long as receivables are collected on time it will be able to meet its obligations Any decrease in Sales cors Slowing of collection of receivables could be very Challenging for the company to manage, especially if it doesn't have sources of cash available.

particulars ist Quarter and quarter Jod Quarter 4thQuarter 9 Sales Inventory purchases 30 days to pay sales cogs other net income $290000 1300000 $290000 145000 135000 $320000 $ 140000 320000 3 80000 $ 195000 1980000 190000 $45000 $250000 45000 225000 35000 190000 Total $1440000 $845000 $144000 20000 40000 $ 180000 160000 135000 135000 SIDDO 10000 $ 25000 $135000 40 inventory $0 885000 Beginning purchase sold $155.00 140000 160000 135000 195000 190000 300000 TuS 000 $ 155000 $140000 250000 225 000 $165000 720000 416560D $ 140000 end inventory $12.6667 10 $106667 996667 fo Beginning Accounts Receivable 380000 450000 1440000 290000 320000 193313 310000 sales collections Ending Accounts 360000 126667 426667 18600D 1290000 10000 $96667 106667 Receivable $46667 $ 100 000 $0 Accounts payable 140 000 195000 Beginning porchases payments 30000 200 000 $65000 10 250000 881000 231667 801667 $83303 $83333 193373 176667 $65000 $ 46667 Ending accounts payable $ 10oooo Beginning cash Collechons payments Ending cash Change in cash $235000 19333) 335000 93703 (914667) 943333 310000 328333 75000 ($18333) 75000 $12373) 1235000 160000 426667 1290000 311667 366667 1341667 123333 187333 18333) $48333 $60poo $(51667)

* Allowing customers less time to pay vastly improves simpson's Cash Situation, with the ending cash balance significantly higher By reducing the period in which customers are allowed to pay to 30 days, there are 30 days less worth of recer tables remains outstanding Simpson Still has 0 days to pay its suppliers, so the east outflows have not changed. Thus the company has identical cash out flows but its cash inflows have ssped up. This is all good news. However, there are some business issues to consider before Simpson should adopt such a policy. Simpson must consider the effect of this policy change on its costomers. It should consider the wind of terms their competitors are offering . Do all their Competitors ofter 60 day to pay cox) ay to more? pay cox) more ? This This could be significant could be at simpson's Customers could leave y take their business to another supplier if these exedit terms were not generous enough for them. Also, the suppliers that offer 30 day payment terms (if any) may price their products slightly more competitively in order to get away with offering a smaller collection period. This decision isn't necessarily a sore way of generating more cash flow in 2018 - Simpson would need a good understanding of that customers & how they may react to such a policy change. If E were the chilf financial officer, I would request more information G. weigh all the pros is cons before making such an important decision.