Question

You are Controller for the Transportation Division of Second Data Inc. A new manager for the division has been appointed and is trying to understand all aspects of operations. Most of her training and experience is in marketing and is having trouble grasping accrual accounting. To aid in your explanation to the manager you derived the graphs below.

Presented in the left graph are trends in sales revenue and cash received from customers over a six-year period. In the right graph are trends in cost of goods sold and cash paid for inventory over a six-year period. All inventory is purchased with cash.

Sales Revenue vs. Cash Received from Customers Cost of Goods Sold vs. Cash Paid for Inventory $120,000 $450,000 $400,000 $100,000 $350,000 $80,000 $300,000 $250,000 $60,000 $200,000 $150,000 $40,000 $100,000 $20,000 $50,000 $0 $0 Year 1 2 3 4 5 6 Year 1 2 3 4 5 6 1 Year-End Balance of Accounts Receivable -Sales Revenue Cash Received from Customers Year-End Balance of Inventory Cost of Goods Sold Cash Paid for Inventory

Answer 1

1. YEAR 1, SALES REVENUE IS HIGHER THAN CASH RECEIVED. SALES REVENUE IS 200,000.

2. YEAR 3, THE SALES AND ACCOUNTS RECEIVABLES ARE HIGH. THEREFORE IT IS THE YEAR WITH LARGE SALE WITHOUT CASH.

3. YEAR 4, THE CASH RECEIVED IS MORE THAN THE SALES REVENUE.

4. YEAR 2, YEAR 4 AND YEAR 6 REPRESENTS CASH RECEIVED IS MORETHAN SALES REVENUE. COMPARING THESE THREE YEAR 4 IS THE LARGEST. IN THIS YEAR THE END BALANCE OF ACCOUNTS RECEIVABLE IS CLOSE TO ZERO AND BELOW 50,000.

5. CASH PAID FOR INVENTORY IS HIGHER IN YEAR 1

6. YEAR 4 CASH PAID FOR INVENTORY IS LARGE WHICH STATES THAT YEAR THE COMPANY PURCHASED LARGE AMOUNT OF INVENTORY.

7. YEAR 5

8. CASH PAID FOR INVENTORY IS MORE THAN COST OF GOODS SOLD IN YEAR 4. THE YEAR END BALANCE OF INVENTORY IS GREATER THAN 20,000