Question

to Banana Rugs is a rug importer located in the US that resells its import products local retailers. Last year it imported $2.5 mio worth of rugs from around the world, all of which were paid for prior to shipping. On receipt of the rugs the importer immediately resold them to local retailers for $3mio but to allow its retail clients to resell the rugs, it sold it on credit. Prior to the end of its business year, Banana Rugs collected 85% of its outstanding. 1. What is the accounting profit that Banana Rugs generated for the year? 2. What is the financial cash flow that Banana Rugs generated for the year? 3. Did it have a successful year from a financial perspective? 4. If the current pattern persists, what is your expectation for the future success of Banana Rugs?

Answer 1

Sol 1. Accounting profit for Banana Rugs is Sales i.e. $3.00 mn less COGS i.e. $2.50 mn which will yield to $0.50 mn.

Sol 2. Financial Cash flow for the year will be Cash Outflows of $ 2.50 mn while Cash inflows will be 85% of $3.00 mn i.e. $2.55 mn thus yielding Net Cash Flow for the year + $0.05 mn.

Sol 3. From a financial perspective Banana Rugs profitability was 16.67% for the year on $0.50 mn profit hence we can say that it had a reasonably successful year but conviction will come once this profitability can be compared with other industry peers.

Sol 4. The current pattern gives COGS to Sales ratio of 0.83 if this holds true then with increase in sales in the future the profitability too would improve. The success in the future for Banana Rugs depends upon its Sales Volume, other things being constant.