For the year just completed, the Combat Wombat Telestat Co. (CWT) reports sales of $998 and costs of $734. You have collected the following beginning and ending balance sheet information:

Question

Ending	Beginning
$110	$100	Accounts receivable
80	100	Inventory
[latex]\underline{70}[/latex]	[latex]\underline{100}[/latex]	Accounts payable
$[latex]\underline{\underline{120}}[/latex]	$[latex]\underline{\underline{100}}[/latex]	Net working capital

Based on these figures, what are cash inflows? Cash outflows? What happened to each account? What is net cash flow?

Accepted Answer

Sales were $998, but receivables rose by $10. So cash collections were $10 less than sales, or $988. Costs were $734, but inventories fell by $20. This means that we didn’t replace $20 worth of inventory, so costs are actually overstated by this amount. Also, payables fell by $30. This means that, on a net basis, we actually paid our suppliers $30 more than we received from them, resulting in a $30 understatement of costs. Adjusting for these events, we calculate that cash costs are $734-20+30=$744. Net cash flow is $988-744=$244.
Finally, notice that net working capital increased by $20 overall. We can check our answer by noting that the original accounting sales less costs of $998-734 is $264. In addition, CWT spent $20 on net working capital, so the net result is a cash flow of $264-20=$244, as we calculated.

Question 10.1: For the year just completed, the Combat Wombat Telestat Co. ...

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