On January 1, 2007, Pepsi Co. purchased inventory for $1000 cash. These goods were sold on April 30, 2007 for $1,400 cash. The company can currently earn 3% interest on an account at a bank.
What is the cost of financing this inventory? a) $10 b) $0 c) $30 d) $400
This may be a trick question for basic accounting students. It gives extra information that may lead them to believe that they have to perform some kind of interest calculation on the $1000. If something is purchased with cash is it financed?
what about the "opportunity cost" of the cash...that might have been used elsewhere?...( $10 ) in financing the $1k over 4 months ( @ 3% anl return ) ??
I remember "opportunity cost" from my managerial accounting class, but I don't think it applies here. This seems like a basic accounting question that deals with the student's understanding of the term "finance." Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement.
I remember "opportunity cost" from my managerial accounting class, but I don't think it applies here. This seems like a basic accounting question that deals with the student's understanding of the term "finance." Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement.
And if the company sat on the cash in the bank instead of utilizing it to buy inventory, their opportunity cost is the $400 they didn't make minus the $10 they could make in the bank.
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