You are Controller for the Transportation Division of Second Data Inc. A new manager for the division has been appointed and is trying to understand all aspects of operations. Most of her training and experience is in marketing and is having trouble grasping accrual accounting. To aid in your explanation to the manager you derived the graphs below. Presented in the left graph are trends in sales revenue and cash received from customers over a six-year period. In the right graph are trends in cost of goods sold and cash paid for inventory over a six-year period. All inventory is purchased with cash.

Sales Revenue vs. Cash Received from Customers Cost of Goods Sold vs. Cash Paid for Inventory $120,000 $450,000 $400,000 $100,000 $350,000 $80,000 $300,000 $250,000 $60,000 $200,000 $150,000 $40,000 $100,000 $20,000 $50,000 $0 $0 Year 1 2 3 4 5 6 Year 1 2 3 4 5 6 1 Year-End Balance of Accounts Receivable -Sales Revenue Cash Received from Customers Year-End Balance of Inventory Cost of Goods Sold Cash Paid for Inventory 1. 2. 3. 4. 5. In Year 1, which is higher Sales Revenue or Cash Received? In which year is it most likely the company had a large sale on account without cash being collected? In which year does it appear the cash from that large sale on account is collected? In a year that cash received from customers is greater than sales revenue, the year-end balance of Accounts Receivable: In Year 1, which is higher Cost of Goods Sold or Cash Paid? In which year is it most likely the company had a large purchase of inventory without it being sold? In which year does it appear the excess inventory was sold without an additional cash purchases of inventory to replace it? In a year that cash paid for inventory is greater than cost of goods sold, the year-end balance of Inventory: 6. 7. 8