The correct answer is: $767,000.
The effect of the acquisition has to be stripped out from the movements in the working capital balances. In each case the balances acquired at acquisition are treated in the same way as the opening balances, i.e. deducted from the closing balance.
Correct answer
|
|
$ |
|
Profit before tax |
775,000 |
|
Decrease in inventory (550 – 475 – 80) |
5,000 |
|
Increase in receivables (943 – 800 – 110) |
(33,000) |
|
Increase in payables (620 – 530 – 70) |
20,000 |
|
|
767,000 |
Incorrect answers
Ignoring impact of acquisition
|
|
$ |
|
Profit before tax |
775,000 |
|
Increase in inventory (550 – 475) |
(75,000) |
|
Increase in receivables (943 – 800) |
(143,000) |
|
Increase in payables (620 – 530) |
90,000 |
|
|
647,000 |
Adjusting for acquisition incorrectly (wrong way round)
|
|
$ |
|
Profit before tax |
775,000 |
|
Increase in inventory (550 – 475 + 80) |
(155,000) |
|
Increase in receivables (943 – 800 + 110) |
(253,000) |
|
Increase in payables (620 – 530 + 70) |
160,000 |
|
|
527,000 |
Adjusting for acquisition incorrectly (only taking group share of assets acquired)
|
|
$ |
|
Profit before tax |
775,000 |
|
Increase in inventory (550 – 475 – 64) |
(11,000) |
|
Increase in receivables (943 – 800 – 88) |
(55,000) |
|
Increase in payables (620 – 530 – 56) |
34,000 |
|
|
743,000 |
Treating the decrease in inventory as an increase
|
|
$ |
|
Profit before tax |
775,000 |
|
Increase in inventory (550 – 475 – 80) |
(5,000) |
|
Increase in receivables (943 – 800 – 110) |
(33,000) |
|
Increase in payables (620 – 530 – 70) |
20,000 |
|
|
757,000 | |
