Working Capital

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 $80,000 B)$416,000 $82,000 C)$414,000 $82,000 D)$414,000 $80,000 Your answer: D was incorrect. The correct answer was B) $416,000 $82,000 Working capital at the end of 20X7 is $416,000 ($350,000 beginning working capital + $150,000 increase in accounts receivable from services – $10,000 office equipment purchase – $54,000 salaries expense accrual – $20,000 consumed supplies). The change in cash was $82,000 ($157,000 collections – $10,000 from equipment purchase – $50,000 salaries paid – $15,000 for payables). How come this is incorrect thinking with regards to working capital? Purchased paint supplies on credit - increase in accounts payable so CL increase

Do CA also increase by the amount of the paint supplies so they offset each other in the working capital calculation?

yes, they go to inventory at $25k, then supplies drop to $5k after $20 are consumed.