Hi, I was wondering if anyone could try and give me a clear answer to this question: Peterson Painting company is a commercial painting contractor. At the begining 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 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 80, 000 B) 416, 000 82, 000 C) 414, 000 82, 000 D) 414, 000 80, 000 Thank you
I would solve it in such a way: NWC = 350.000 Services on credit +150.000 Office equipment - 10.000 Salaries expense - 54.000 Paint supplies on cred. increase in assets and liabilities Paint supplies used - 20.000 Paid salaries decrease in assets and liabilities Paid acc. payable decrease in assets and liabilities TOTAL 416.000 Change in cash: Payment of office equipment - 10.000 Paid salaries - 50.000 Coll. acc. receivables + 157.000 Paid acc. payable - 15.000 TOTAL + 82.000
I did it the same way, answer B. My advise is, think of it in terms of journal entries. For instance: 1) Recognized salaries expense 54, 000 2) Paid salaries 50, 000 1) Dr. Salary Expense 54k Cr. A/P 54k 2) Dr. A/P 50k Cr. Cash 50k See that the Cash impact only comes from actually paying the cash out. However, the Working Capital is effected by the LIABILITY of the Salary Expense. Therefore, the impact on these 2 items would be WC decrease of 54k and cash decrease of 50k
Thanks!