Question

Ponzi Products produced 100 chain-letter kits this quarter, resulting in a total cash outlay of $10 per unit. It will sell 50 of the kits next quarter at a price of $11, and the other 50 kits in the third quarter at a price of $12. It takes a full quarter for Ponzi to collect its bills from its customers. (Ignore possible sales in earlier or later quarters.) (Negative amount should be indicated by a minus sign.)
(a) Prepare an income statement for Ponzi for today and for each of the next three quarters. Ignore taxes. (LO1)

(b) What are the cash flows for the company today and in each of the next three quarters? (LO3)

(c) What is Ponzi’s net working capital in each quarter? (LO1)

Answer 1

Answer:

Explanation:

From the given information: we are to:

a)  Prepare an income statement for Ponzi for today and for each of the next three quarters. Ignore taxes. (LO1)

An income statement involves depicts the achievement of a certain business over  a period of time .

The income statement for Ponzi for today and for each of the next three quarters is as follows:

                        Quarter 1      Quarter 2       Quarter 3        Quarter 4

Sales                   $0                  $550              $600             $0

 (-)

cost of goods       0                   $500              $500             $0

sold

Net income           0                  $50                 $100               0

We will see that  in the first and the fourth quarter ; the firm neither pay any cash to purchase goods nor collect cash for sales. Thus ; the cashflow will be zero in those instances and we will consider only the second and the fourth quarter for sales income and production cost.

SO:

Quarter 2 sales = 50 × 11 = $550

Quarter 3 sales = 50 × 12 = $600

(b) What are the cash flows for the company today and in each of the next three quarters?

Cash flow is like a database that helps to keep tracks and records the cash inflows and cash outflows of a financial instrument.

The cash flow in each month is as follows:

                        Quarter 1      Quarter 2       Quarter 3        Quarter 4

Sales                   $0                  $550              $600             $0

 (-)

cost of goods       0                   $500              $500             $0

sold

Net income           0                  $50                 $100               0

Inventories         $1000          $500                   0                  0

Account

Receivables       0                    550                  600                0

Net working

capital                 $1000          $1050             $600                0

Change in WC   $1000           $50                 $450              $600

CashFlow           $1000          $0                  $550              $600

Hint:

The Cash flow = net income - change in net working capital

The net working capital = Inventory + Account receivables

Quarter 2 sales = 50 × 11 = $550

Quarter 3 sales = 50 × 12 = $600

(c) What is Ponzi’s net working capital in each quarter? (LO1)

The net working capital in each quarter can be illustrated as :

                        Quarter 1      Quarter 2       Quarter 3        Quarter 4

Inventories        $1000             $500              0                    $0

Account recei-    0                   $550              $600             $0

vables

Net working       $1000             $1050           $600               $0

capital