Emphasis on Cash Flows: Worldwide Rugs is a rug importer located in the United States that
resells its import products to local retailers. Last year Worldwide Rugs imported $2.5 million worth of rugs from around the world, all of which were paid for prior to shipping. On receipt of the rugs, the importer immediately resold them to local retailers for $3 million. To allow its retail clients time to resell the rugs,
Worldwide Rugs sells to retailers on credit. Prior to the end of its business year, Worldwide Rugs collected 85% of its outstanding accounts receivable.
a. What is the accounting profit that Worldwide Rugs generated for the year?
b. Did Worldwide Rugs have a successful year from an accounting perspective?
c. What is the financial cash flow that Worldwide Rugs generated for the year?
d. Did Worldwide Rugs have a successful year from a financial perspective?
e. If the current pattern persists, what is your expectation for the future success of Worldwide Rugs?
Hint: Use the table below.
Accounting View (accrual basis) Financial View (cash basis)
Worldwide Rugs income statement Worldwide Rugs cash flow statement
for the year ended 12/31 for the year ended 12/31
Sales revenue $? Cash inflow $?
Less: Costs ? Less: Cash outflow ?
Net profit $? Net cash flow $?
B) Yes, Worldwide rugs have a successful year from an accounting perspective D) Yes, Worldwide rugs have successful... View the full answer