This is the information on an organisation’s activities over the past year
• Sale were $5,000,000. The value of accounts receivable was $450,000 at the start of the year and $525,000 at the end of the year
• The value of direct costs was $2,500,000 and 75% of this was bought on credit
• Indirect costs were $3,000,000 and 25% of this was bought on credit
• During the year the organization spent $1,500,000 on new assets and sold $150,000 of old assets. $1,000,000 of the spend on assets was funded by a bank loan
• The organization declared a dividend of $200,000 at the end of the year but this was not paid for another two months
• Opening balance was $175,000
Which of the following is the bank balance of that organization at the end of the year?
A . $1,675,000
B. $1,875,000
C. $1,700,000
D. $2,025,000
Answer: B
Explanation:
In this question, you should understand the concept of cash flow and formula of cash flow.
Cash flow calculates the physical money moving in and out a company’s bank balance.
The cash flow from sale activity is:
cash flow from sale = account receivable at beginning of the year + revenue – account receivable at the end of the year = $450,000 + $5,000,000 – $525,000 = $4,925,000
75% of direct costs was bought by credit, therefore, the company spent 25% on direct cost:
-$2,500,000*25/100 = -$625,000
25% of indirect costs was bought on credit. Cash flow out on indirect costs is: – $3,000,000*75/100 = -$2,250,000
Company spent $1,500,000 on new assets funded by a loan of $1,000,000. Cash flow out from this activity is -$500,000
Company received $150,000 from selling old assets
Dividends have not been paid for another 2 months, thus, they are not accounted as cash flow out.
The bank balance at the end of the year is: $175,000 + $4,925,000 – $625,000 – $2,250,000 – $500,000 + $150,000 = $1,875,000 LO 1, AC 1.4
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