Bad question

CFA Level I
#1

Question ID#: 97940 Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s net working capital was $350,000. The following transactions occurred during 20X7: Performed services on credit $150,000 Purchased office equipment for cash 10,000 Recognized salaries expense 54,000 Purchased paint supplies on on credit 25,000 Consumed paint supplies 20,000 Paid salaries 50,000 Collected accounts receivable 157,000 Recognized straight-line depreciation expense 2,000 Paid accounts payable 15,000 Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7. Working capital Change in cash A) $414,000 $82,000 B) $416,000 $82,000 C) $416,000 $80,000 No way for under 1.5 minutes!

#2

Not that hard. Change in cash first: -10k, -25k, -50k, +157k, -15k = -57k Working capital: +350k, +157k, -10k, -54k, -20k, -50k, = 373k Well, I give up!

#3

Okay, here’s cash -10k, -50k, +157k, -15k = -82k

#4

I would go for B… not because I was able to solve it but guess it…however, Agree I get AR = <7K> Cash 82K Inv <20K> CA=55K AP = 54+25-50-15=14K I am getting WC change=41K So 350+41=$391K

#5

Cash is easy, but how do they get W/C? I’m also having difficulty on this one

#6
  1. Working Capital is: Cash + Cash Equivalents + Inventory + Receivables - Payables 350 K ( Initial Working Capital) + 150 K (Performed services on credit $150,000 hence increase in AR Account) - 10 K (Purchased office equipment hence reduction in Cash Account) - 54 K (Increase in Salary Expense liability) - 25 K (Increase in AP Account for purchasing Paint Supplies) + 5 K (Consumed Paint supplies worth 20K, so remaining 5K increase Inventory AC) - 0 K (paid salaries of 50K does not have any overall affect. It reduces Salary liability from 54K to 4K, but also reduces Cash AC by 50K) + 0 K (Collected Account Receivable 157K does not have any affect either. It reduces AR Asset AC by 157K but increases another Asset AC Cash by the same amount) + 0 K (Depreciation expense of 2K does not have any affect on Working Capital) - 0 K (Paid AP 15K does not have any affect. It reduces AP Liability AC by 15K, but also reduces Cash AC by the same amount) = 416K 2. Change in Cash is: - 10K (Purchased office equipment for cash 10,000) - 50K (Paid salaries 50,000) + 157K (Collected accounts receivable 157,000) - 15K (Paid accounts payable 15,000 = 82K
#7

Look good. BUT the question says “net working capital” and not “working capital”. In net working capital you dont include cash.

#8

Net working capital is Change in (Current Assets - Current Liabs). and Current Assets does include Cash.

#9

cpk123 Wrote: ------------------------------------------------------- > Net working capital is Change in (Current Assets - > Current Liabs). > and Current Assets does include Cash. That definition differs from definitions elsewhere… Sorry, just focus on the formulas given in the books