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Learning Goal 4
ST1-1 Emphasis on Cash Flows Worldwide Rugs is a rug importer located in the United States that resells its import products to local retailers. Last year, Worldwide Rugs imported $2.5 million 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 $3 million. To allow its retail clients time to resell the rugs, Worldwide Rugs sells to retailers on credit. Prior to the end of its business year, Worldwide Rugs collected 85% of its outstanding accounts receivable.
- a. What is the accounting profit that Worldwide Rugs generated for the year?
- b. Did Worldwide Rugs have a successful year from an accounting perspective?
- c. What is the financial cash flow that Worldwide Rugs generated for the year?
- d. Did Worldwide Rugs have a successful year from a financial perspective?
- e. If the current pattern persists, what is your expectation for the future success of Worldwide Rugs?
a)
To determine: The accounting profit that the WR Company incurred during the year.
Introduction:
Monetary costs that a firm pays out and the revenue a firm generated during the year is termed as accounting profit. This is considered as the bookkeeping profit which is greater than the economic profit.
Answer to Problem 1.1STP
The accounting profit that the WR Company incurred during the year is $500,000.
Explanation of Solution
Given information:
The WR Company has imported $2,500,000 of rugs and sales revenue of rugs is $3,000,000.
The formula to compute accounting profit is as follows:
Compute accounting profit:
Hence, the accounting profit that the WR Company incurred during the year is $500,000.
b)
To discuss: Whether the WR Company had a successful year from an accounting perspective.
Explanation of Solution
The WR Company had a successful year from an accounting viewpoint. It is because the company was profitable and it has generated 20 percent profit
c)
To determine: The financial cash flow that the WR Company incurred during the year.
Answer to Problem 1.1STP
The financial cash flow that the WR Company generated during the year is $50,000.
Explanation of Solution
Given information:
The WR Company has imported $2,500,000 of rugs and sales revenue of rugs is $3,000,000.
Note: Refer Excel to determine the value of cash inflows.
The formula to compute financial cash flow is as follows:
Compute financial cash flow:
Hence, the financial cash flow that the WR Company incurred during the year is $50,000.
d)
To discuss: Whether the WR Company had a successful year from a financial perspective.
Explanation of Solution
The WR Company has generated a positive cash flow. However, the Company has only 2 percent return on investment
e)
To discuss: The Person X expectation of the WR Company’s future success.
Explanation of Solution
The WR Company has a risk associated with the importing system and ability to collect on its accounts receivables. The Company has only 2 percent return on investment
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Chapter 1 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
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Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning