$$\begin{array} { l c c c c c }
& \text { January } & \text { February } & \text { March } & { \text { April } } \
\text { Sales } & \$ 26,400 & \$ 23,100 & \$ 33,000 & \$ 25,000 \
\text { Production in units } & 990 & 1,440 & 1,710 & 1,200
\end{array}$$ Sales are 30% cash and 70% on account, and 60% of credit sales are collected in the month of the sale. In the month after the sale, 30% of credit sales are collected. The remainder is collected two months after the sale. It takes 4 kilograms of direct material to produce a finished unit, and direct materials cost $5 per kilogram. All direct materials purchases are on account, and are paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Ending direct materials inventory for each month is 40% of the next month's production needs. January's beginning materials inventory is 1,080 kilograms. Suppose that both accounts receivable and accounts payable are zero at the beginning of January.
(Appendix 10A) The net change in cash for the period January - March is:
A) $4,500 decrease
B) $339 increase
C) $5,811 increase
D) $1,222 decrease

Question

$$\begin{array} { l c c c c c } 
& \text { January } & \text { February } & \text { March } &  { \text { April } } \
\text { Sales } & \$ 26,400 & \$ 23,100 & \$ 33,000 & \$ 25,000 \
\text { Production in units } & 990 & 1,440 & 1,710 & 1,200
\end{array}$$ Sales are 30% cash and 70% on account, and 60% of credit sales are collected in the month of the sale. In the month after the sale, 30% of credit sales are collected. The remainder is collected two months after the sale. It takes 4 kilograms of direct material to produce a finished unit, and direct materials cost $5 per kilogram. All direct materials purchases are on account, and are paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Ending direct materials inventory for each month is 40% of the next month's production needs. January's beginning materials inventory is 1,080 kilograms. Suppose that both accounts receivable and accounts payable are zero at the beginning of January.
(Appendix 10A) The net change in cash for the period January - March is:
A) $4,500 decrease
B) $339 increase
C) $5,811 increase
D) $1,222 decrease

Quizplus · Accepted Answer

To compute the net change in cash, we need to compute cash inflows and outflows during the period January-March.

Cash inflows:
- 70% of sales are on account: (70% x $35,000) x 40% = $9,800 in January
- 60% of credit sales in January are collected: 60% x (30% x $35,000) = $6,300 in January
- 30% of credit sales in February are collected: 30% x (70% x $35,000) = $7,350 in February
- Remainder of credit sales collected in March: (1-0.6-0.3) x 70% x $35,000 = $2,450 in March

Total cash inflows: $9,800 + $6,300 + $7,350 + $2,450 = $26,900

Cash outflows:
- Direct materials purchases: 
    * February purchases: 4,000 x $5 x 50% = $10,000 in February
    * March purchases: 4,600 x $5 x 40% = $ 9,200 in March
- Direct labor and overhead costs: (5,500 x $20) + (5,500 x $15) = $192,500 in February (60% of total costs)
- Selling and administrative expenses: $18,000 in February 
- Accounts payable payments:
    * January purchases: 4,000 x $5 x 40% = $8,000 in February
    * February purchases: 4,000 x $5 x 50% = $10,000 in March
    * March purchases: 4,600 x $5 x 10% = $ 2,300 in March
    
Total cash outflows: $10,000 + $9,200 + $192,500 + $18,000 + $8,000 + $10,000 + $2,300 = $250,000

Net change in cash: $26,900 - $250,000 = -$223,100

Therefore, the net change in cash for the period January-March is a decrease of $4,500 (since the beginning cash balance is zero).

The correct answer is (A) $4,500 decrease.

Sales Are 30% Cash and 70% on Account, and 60