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?

Answer 1

Simpson has 100% markup on Cost of goods sold (COGS). Therefore it markup on sales is 50%.

a) Income Statement of Simpson is as under

Particulars	Q1	Q2	Q3	Q4	For the year
Sales	290000	320000	380000	450000	1440000
COGS ie. 50% of sales	145000	160000	190000	225000	720000
Operating Cost	135000	135000	135000	135000	540000
Profit	10000	25000	55000	90000	180000

b) Status of inventory on each quarter & year ended

Particulars	Q1	Q2	Q3	Q4	For the year
Operning Inventory		155000	135000	140000
Inventory purchased	300000	140000	195000	250000
Utilisation of Inventory	145000	160000	190000	225000
Closing inventory on each quarter & year ended	155000	135000	140000	165000	165000

c) Account receivable at the end of each quarter & year ended: Since Simpson allow to pay 60 days on sales. Therefore average 2 months respective quarter sales amount shown as outstanding on each quarter.

Particulars	Q1	Q2	Q3	Q4	For the year
Sales	290000	320000	380000	450000
2 months sales - Account receivable	193333	213333	253333	300000	300000

d) Account payable at the end of each quarter and year ended : Since Simpson will pay in 30 days to his suppliers. Therefore average 1 months respective quarter purchase amount shown as outstanding on each quarter.

Particulars	Q1	Q2	Q3	Q4	For the year
Purchase	300000	140000	195000	250000
2 months sales - Account receivable	100000	46667	65000	83333	83333