Solutions to Review questions - Chapter 3
Accounting and Finance
13. Cash flow from operations can be positive even if net income is negative. For example, if depreciation expenses are large, then negative net income might correspond to positive cash flow because depreciation is treated as an expense in calculating net income, but does not represent a cash outflow.
Conversely, if net income is positive, but a large portion of sales are made on credit, cash flow can be negative since the sales are revenue but do not yet generate cash. Look back to Table 3-3, and you will see that increases in accounts receivable reduce cash provided by operations.
14. The calculations are presented in the following table. Sales occur in quarters 2 and 3, so this is when the cost of goods sold is recognized. Therefore, net income is zero in quarters 1 and 4. In quarter 1, the production of the kits is treated as an investment in inventories. The level of inventories then falls as goods are sold in quarters 2 and 3. Accounts receivable in quarters 2 and 3 equal the sales in those quarters since it takes one quarter for receivables to be collected. Notice that cash flow in quarter 1 equals the cost of producing the kits, and in quarters 3 and 4, cash flow equals cash received for the kits previously sold.
|a. |Quarter 1 |Quarter 2 |Quarter 3 |Quarter 4 |
|Sales | $ 0 | $ 550 | $ 600 | $ 0 |
|Cost of goods sold | 0 | 500 | 500 | 0 |
|Net income | $ 0 | $ 50 | $ 100 | $ 0 ...