# 2 questions

thanks for the help! question 1: -------------- Net sales: 500 increase in A/R: 20 decrease in A/P: 40 increase in inventory: 30 sale of common stock: 100 repayment of debT: 10 depreciation: 2 net income: 100 interest expense on debt: 5 if ending cash balance is \$200, what is the beginning cash balance? question 2 -------------- a company has a cash conversion cycle of 70 days. if the companys payables turnover decreases from 11 to 10 and receivables days increase by 5, which of the following statements is correct; the companys cash conversion cycle will: a. decrease by approximately 8 days b. decrease by approximately 3 days c. increase by approx. 3 days d. increase by approx. 2 days

1. \$105 2)D

Correct Answers: 1) \$98 2) D thats according to Schweser, but i dont have explanations, can someone explain how they got to these?

Question 2 D Payables turnover…goes from 33 days…to 36.5 days… so that would be an decrease of 3.5 days But since Recievable days INCREASED by 5…it nets out against that… total formula =Inventory Conv Days+Recievable days- Payables days

x -20 - 30 - 40 + 100 - 10 +100 - 5 = 200 X = 105 one of the two , c or d. dont know the formula’s i’ll guess c.

First problem Beginning cash balance = Ending cash balance - changes in cash during the year CFO during the year = 100(NI)+2(depreciation)-20(increase A/R)-40(decrease A/P)-30 (increase inventory)=12 CFI = 0, no change in investments CFF=100(sale of common stock)-10(repayment of debt)=90 Total change in cash: 12+90=102 Beginning balance of cash = 200-102=98 Interest and dividends received, interest expense paid and income taxes paid are all non-operating income statement positions under the DIRECT method. They have no place in the INDIRECT METHOD, and we use the later one because the preponderance of evidence indicates its use. For the second problem: payables go down, that means days payables outstanding goes up: from 365/11 to 365/10, that’s from 33.18 to 36.5 Days receivables went up 5 days, total change is 5-(36.5-33.18)~1.68, say 2.

very detailed explanation, thanks map!

map, not nice to see you charge depreciation to the operating cash flow.

You better hit the books with the indirect CFO:) pepp Wrote: ------------------------------------------------------- > map, not nice to see you charge depreciation to > the operating cash flow.

pepp Wrote: ------------------------------------------------------- > map, not nice to see you charge depreciation to > the operating cash flow. You add back depreciation in the indirect cash flow

How do you know to us indirect for this? When would you use direct? I know the difference b/t the 2 but I don’t know when to use what. If NI is shown, do I use indirect?

The preponderance of evidence: AR, AP, NI, Depreciation. You don’t have COGS, cash paid to suppliers, cash paid to employees for labor, other SG&A to do the direct method.

Thanks. All I ever see is indirect, I need to go back and read direct again.

it depends upon the question, for direct method we need to caluclate cash recieved from customers, cash paid to suppliers, and also other cash expenses paid. Now for above question, we can calulate cash recieved from customers but cant do the others to complete a direct method cash flows. But there was ample info for indirect method and we can use it to get the answer.

indirect is a better measure for seeing quality earnings between operatin cash flow and net income direct is better to see what is driving operating cash flow

map1 nice one preponderance of evidence

That’s not me, that’s Peter Olinto of Stalla:)) I LOVE HOW THIS GUY TEACHES!