Problem 11 - Accounting

Question

During the month, Wembley Co. received \(\$ 212,500\) in cash and paid out \(\$ 183,750\) in cash. a. Do the data indicate that Wembley Co. eamed \(\$ 28,750\) during the month? Explain. b. If the balance of the cash account is \(\$ 36,300\) at the end of the month, what was the cash balance at the beginning of the month?

Step-by-Step Solution

Answer

a. No, net cash flow does not equal earnings. b. Beginning balance was \(\$7,550\).

Step 1: Identify the Cash Inflow and Outflow

Wembley Co. received cash amounting to \(\\(212,500\) and paid out \(\\)183,750\) during the month. These figures represent the cash inflow and cash outflow, respectively.

Step 2: Calculate Net Cash Flow

To determine if there is a net cash inflow or outflow, subtract the cash paid out from the cash received: \(212,500 - 183,750 = 28,750\). This suggests a net cash inflow of \(\$28,750\).

Step 3: Determine if the Net Cash Flow is Earnings

The problem asks if the net cash inflow of \(\\(28,750\) is equivalent to earnings. Cash inflow does not directly equate to earnings as earnings also include non-cash revenues and expenses. Therefore, this net cash flow does not necessarily indicate earnings as it excludes other revenues and accruals. Thus, the data does not necessarily indicate that Wembley Co. earned \(\\)28,750\).

Step 4: Set Up the Cash Balance Equation

The given end balance of the cash account is \(\$36,300\). The beginning cash balance can be calculated by adding the net cash flow to the beginning balance. Let \(x\) be the cash balance at the beginning of the month. The equation becomes: \[ x + 28,750 = 36,300 \]

Step 5: Solve for the Beginning Cash Balance

To find \(x\), subtract the net cash flow from the ending cash balance: \[ x = 36,300 - 28,750 = 7,550 \]. Thus, the cash balance at the beginning of the month was \(\$7,550\).

Key Concepts

Net Cash Flow

When understanding the concept of Net Cash Flow, think of it as the difference between money coming into and going out of a business during a specific period. In the case of Wembley Co., they received \(212,500\) and paid \(183,750\) within the month. To calculate the Net Cash Flow, we simply subtract the cash outflow from the cash inflow: \\(212,500 - 183,750 = 28,750\). \This shows that Wembley Co. had a net cash inflow of \(28,750\) for the month. This figure is crucial as it indicates the liquidity of a company in that period, reflecting whether they are increasing their available cash or depleting their reserves. A positive net cash flow, like in this scenario, suggests that the business is capable of covering its expenditures with its income, possibly allowing for additional investment or saving opportunities.

Earnings vs Cash Flow

It's important to differentiate between cash flow and earnings, as they are not the same. Net cash flow looks purely at the cash transactions, but earnings also include non-cash items. These can be revenues and expenses that may not involve immediate cash exchange, such as depreciation or credit sales. In Wembley Co.'s case, having a net cash inflow of \(28,750\) does not necessarily mean they earned that amount. Earnings might include other factors like accounts receivable or payable, which affect the income statement differently from the cash flow. Therefore, even with positive cash flow, a business can report little to no profit, or vice versa, depending on these additional elements.

Cash Balance Calculation

Calculating a company's cash balance involves understanding both the beginning and ending positions in their cash account, adjusted for the net cash flow. Given that Wembley Co.'s ending cash balance is \(36,300\), we can determine the starting balance by working backward with the net cash flow. The formula to determine the starting cash balance is: \[ x + 28,750 = 36,300 \] Solving for \(x\), we subtract the net cash flow from the ending balance: \[ x = 36,300 - 28,750 = 7,550 \] This result tells us that the beginning cash balance for the month was \(7,550\). Knowing the cash balance at different points helps managers track the financial health and fluidity of the business over time. It is an essential step in ensuring sufficient funds are present to meet immediate obligations.