Accounting and Finance
Accounting revenues and expenses can differ from cash flows because some items
included in the computation of revenues and expenses do not entail immediate cash
For example, sales made on credit are considered revenue even though cash
is not collected until the customer makes a payment.
Also, depreciation expense
reduces net income, but does not entail a cash outflow.
Conversely, some cash flows
are not included in revenues or expenses.
For example, collection of accounts
receivable results in a cash inflow but is not revenue.
Purchases of inventory require
cash outlays, but are treated as investments in working capital, not as expenses.
Working capital ought to be increasing.
The firm will be building up stocks of
inventory as it ramps up production.
In addition, as sales increase, accounts receivable
will increase rapidly.
While accounts payable will probably also increase, the increase in
accounts receivable will tend to dominate since sales prices exceed input costs
a.Cash will increase as one current asset (inventory) is exchanged for another (cash).
Cash will increase.
The machine will bring in cash when it is sold, but the lease
payments will be made over several years.
c.The firm will use cash to buy back the shares from existing shareholders.
balance will decrease.
Net income = Increase in retained earnings + dividends
$900,000 = ($3,700,000
$3,400,000) + dividends
dividends = $600,000