Cash Collections and Costs

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:

Â	Beginning	Ending
Accounts receivable	$100	$110
Inventory	100	80
Accounts payable	100	70
Net working capital	$100	$120

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