# Working Capital Question

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) \$416,000 \$82,000 B) \$416,000 \$80,000 C) \$414,000 \$82,000 D) \$414,000 \$80,000

will come back.

change in cash, - 10 - 50 + 157 - 15 = 82 working capital will mean 82 + change in non cash items ran out of time. sorry.

Performed services on credit \$150,000 (increase \$150 receivables, \$150 increase revenues) Purchased office equipment for cash 10,000 (decrease \$10 cash, \$10 increase fixed assets) Recognized salaries expense 54,000 (no Working Capital) Purchased paint supplies on on credit 25,000 (increase \$25 fixed assets, \$25 increase receivables) Consumed paint supplies 20,000 (decrease \$20 inventory) Paid salaries 50,000 (decrease \$50 cash, \$50 salary expense) Collected accounts receivable 157,000 (increase \$157 cash, \$157 decrease receivables) Recognized straight-line depreciation expense 2,000 (Not working capital management) Paid accounts payable 15,000 (decrease \$50 cash, \$50 decrease payables) I get 415!

Answer is A 350+150 (service on credit)-10 (buy equip) - 20 (use paint) - 54 (recognize Salary expense)=416 I got tripped up on recognizing salary expense. Anyone know why we use this?

MT327 Wrote: ------------------------------------------------------- > Answer is A > > 350+150 (service on credit)-10 (buy equip) - 20 > (use paint) - 54 (recognize Salary expense)=416 > > I got tripped up on recognizing salary expense. > Anyone know why we use this? Sorry, I just realized there are mistake in my answer… I think I need to go to sleep. you count “recognized salary expenses” because you may count it as an accrual since you recognized that they are part of 2007 but you will have the cash outflow in 2008… However, I am not sure…

A MT327, use salary expense and not salary paid by cash because salary expense increases liabilities. Paying salary expense will decrease current asset and decrease current liabilities, thus have no affect on working capital. Working captial = current asset - current liabilities.

How come you take away \$10k for office equipment Aren’t you just convert one asset into another? Or is it because office equipment is considered to be a consumable?

Office equipment is not a current asset. You cannot easily sell it for cash.

"Recognized straight-line depreciation expense 2,000 " is this not considered current portion of long-term debt? in which case I get C.