Can someone please walk me through this 3 statement accounting question - a company buys 10 of inventory in cash, and sells it for 20 in the same period on account. Assume 40% tax rate. How does it flow through the three statements?
Thanks in advance
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Hi Prospect in IB - Gen, whoops, looks like nobody chimed in here.... maybe one of these discussions below is relevant:
More suggestions...
Fingers crossed that one of those helps you.
Deleted
If we don't do buying the inventory and selling the inventory as diff changes, I would think
IS: Revenue is up 20, COGS up 10 --> Pretax Inc up 10/ N.I up 6
CFS: N.I up 6 and no other change bc Inventory was bought and sold, so overall cash is up 6
BS: Cash is up 6, NC in Inventory : Assets are up 6 and under SE: retained earnings is up 6 as well
Not sure tho, if someone can confirm
This is an atypical question since it has you buying and selling the inventory in one fowl swoop.
But if that’s the case, this answer is correct.
You ended up getting the right answer still, but I do believe you forgot to account for accounts receivable. The inventory was sold on account, so the CFS would need to be adjusted for the change in accounts receivable and hence current assets. Rest of your answer is correct though.
Good catch didn't see that
I know who this is...
IS: Pre-tax income goes up by $10 because of the $20 revenue from selling inventory and the COGS expense of $10. With 40% marginal tax rate, net income goes up by $6.
CFS: Net income flows into CFO, which is up by $6. We then have to adjust for changes in net working capital. The inventory doesn't actually increase or decrease in this scenario because it is bought and then sold immediately. However, accounts receivable goes up by $20 because the inventory was sold on account. Increases in current assets decrease CFO. CFO goes down by $14 (6-20). No other changes to CFS, so net change in cash is down by $14.
B/S: Cash is down by $14, and accounts receivable is up by $20. Net result is assets are up by $6. Net income flows into retained earnings, which is now up by $6. Retained earnings is an SE account. Assets are up by $6 and SE is up by $6, so we are balanced.
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