Balance Sheet and Inventory

Chapter 4 Discussion Questions 4-1. What be the prefatory benefits and purposes of developing pro forma statements and a hard currency budget? The pro-forma financial statements and capital budget enable the flying to determine its future level of asset shoots and the associated financing that forget be required. Further more, one dejection track actual events against the projections.Bankers and former(a) l deceaseers also use these financial statements as a guide in credit decisions. 4-2. Explain how the collections and secures entrys are related to the borrowing needs of the corporation. The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid.To the extent collections do not cover purchasing hails and other financial requirements, the starchy must look to borrowing to cover the deficit. 4-3. With inflation, what are the implications of using LIFO and first in first out schedule meth ods? How do they affect the personify of goods sell? LIFO scrutinise valuation assumes the latest purchased enrolment becomes part of the cost of goods sold, while the FIFO method assigns stock-take items that were purchased first to the cost of goods sold. In an inflationary environment, the LIFO method provide result in a higher cost of goods sold check and one that more accurately matches the taxation bargains dollars recorded at urrent dollars. 4-4. Explain the relationship between blood turnover and purchasing needs. The more rapid the turnover of inventory, the greater the need for purchase and replacement. Rapidly act inventory makes for somewhat greater ease in foreseeing future requirements and shrinks the cost of carrying inventory. 4-5. Rapid corporate improver in gross sales and emoluments can cause financing problems. Elaborate on this statement. Rapid app conclusionage in sales and winningss is often associated with ra pid growth in asset commitment. A $100,000 join on in sales may cause a $50,000 profit in assets, with perhaps only $10,000 of the recent financing coming from profits. It is very seldom that incremental profits from sales expansion can attain new financing needs. 4-6. Discuss the advantage and disadvantage of level output signal schedules in firms with cyclical sales. level return in a cyclical industry has the advantage of allowing for the maintenance of a stable movement force and reducing inefficiencies caused by shutting down production during obtuse periods and accelerating work during crash production periods.A major drawback is that a large stock of inventory may be accumulated during the slow sales period. This inventory may be expensive to finance, with an associated danger of obsolescence. 4-7. What conditions would help make a portion-of-sales prospect almost as accurate as pro forma financial statements and bills budgets? The share-of-sales forecast is only as good as the functional relationship of assets and liabilities to sales.To the extent that past relationships accurately depict the future, the share-of-sales method will give values that reasonably re pass on the values derived through the pro-forma statements and the inter modify budget. Chapter 4 professionalblems 1. Eli Lilly is very excited because sales for his nursery and plant company are anticipate to double from $600,000 to $1,200,000 close course of instruction. Eli notes that crystallise assets (Assets Liabilities) will remain at 50 part of sales. His firm will enjoy an 8 pct collapse on match sales.He will start the class with $120,000 in the bank and is bragging close to the Jaguar and luxury townhouse he will buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likely cash balance or deficit for the remnant of the course of instruction. Start with pedigree cash and subtract t he asset buildup (equal to 50 percent of the sales increase) and add in profit. 1 closure Eli Lilly Beginning cash$120,000 Asset buildup(300,000)(1/2 ? $600,000) proceeds 96,000(8% ? $1,200,000) determination cash($84,000)Deficit No, he will actually end up with a negative cash balance. 2.In problem 1 if there had been no increase in sales and all other facts were the same, what would Elis terminus cash balance be? What lesson do the examples in problems 1 and 2 illustrate? 4-2. firmness Eli Lilly (continued) Beginning cash$120,000 No asset buildup Profit 48,000(8% ? $600,000) mop up cash$168,000 The lesson to be learned is that increased sales can increase the financing requirements and reduce cash even for a profitable firm. 3. Gibson Manufacturing Corp. expects to sell the following tote up of building block of measurement of measurement of measurements of steel cables at the prices indicated at a lower place three different scenarios in the economy.The probability o f each outcome is indicated. What is the judge value of the total sales projection? OutcomeProbabilityUnits harm A0. 20100$20 B0. 5018025 C0. 3021030 4-3. base Gibson Manufacturing Corporation (1) (2) (3) (4) (5) (6) Expected innate Value Outcome Probability Units Price Value (2 ? 5) A . 20 100 $20 2,000 400 B . 50 180 $25 4,500 2,250 C . 0 210 $30 6,300 1,8900 integral expected value $4,540 4. The all(prenominal)iance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated. What is the expected value of the total sales projection? OutcomeProbabilityUnitsPrice A0. 30200$15 B0. 5032030 C0. 2041040 4-4.Solution Alliance Corporation (1) (2) (3) (4) (5) (6) Expected essential Value Outcome Probability Units Price Value (2 ? ) A . 30 200 $15 $3,000 900 B . 50 320 $30 9,600 4,800 C . 20 410 $40 16,400 3,280 impart expected value $8,980 . ER medical checkup Supplies had sales of 2,000 units at $160 per unit last year. The merchandise manager projects a 25 percent increase in unit volume this year with a 10 percent price increase. Returned intersection will represent 5 percent of total sales. What is your net dollar sales projection for this year? 4-5. Solution ER Medical Supplies Unit volume 2,000 ? 1. 25 2,500 Price $160 ? . 10 $176 aggregate sales $440,000 Returns (6%) 22,000 Net gross sales $418,000 6. Cyber Security Systems had sales of 3,000 units at $50 per unit last year.The marketing manager projects a 20 percent increase in unit volume sales this year with a 10 percent price increase. Returned merchandise will represent 6 percent of total sales. What is your net dollar sales projection for this year? 4-6. Solution Cyber Security Systems Unit volume 3,000 ? 1. 20 3,600 Price $50 ? 1. 10 ? 55 fit Sales $198,000 Returns (6%) 11,880 Net Sales $186,120 7. Sales for Ross Pros Sports Equipment are expected to be 4,800 units for the coming calendar calendar month.The company likes to uphold 10 percent of unit sales for each month in stop inventory. Beginning inventory is 300 units. How many units should the firm produce for the coming month? 4-7. Solution Ross Pros Sports Equipment + Projected sales 4,800 units + desire destination inventory 480 (10% ? ,800) Beginning inventory 300 Units to be produced 4,980 8. Digitex, Inc. , had sales of 6,000 units in evidence.A 50 percent increase is expected in April. The company will maintain 5 percent of expected unit sales for April in ending inventory. Beginning inventory for April was 200 units. How many units should the company produce in April? 4-8. Solution Digitex, Inc. + Projected sales 9,000 units (6,000 ? 1. 5) + Desired ending inventory 450 units (5% ? ,000) Beginning inventory 200 units Units to be produced 9,250 units 9. Hoover Electronics has beginning inventory of 22,000 units, will sell 60,000 units for the coming month, and desires to reduce ending inventory to 30 percent of beginning inventory. How many units should Hoover produce? 4-9. Solution Hoover Electronics + Projected sales 60,000 units + Desired ending inventory 6,600 (30% ? 22,000) Beginning inventory 22,000 units Units to be produced 44,600 units 0. On declination 31 of last year, Barton argumentation Filters had in inventory 600 units of its product, which costs $28 per unit to produce. During January, the company produced 1,200 units at a cost of $32 per unit. Assuming Barton seam Filters sold 1,500 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? 4-10. Solution Barton Air Filters exist of goods sold on 1,500 units overage inventory bar (Units) 600 exist per unit $ 28 Total $ 16,800 New inventory Quantity (Units) 900 Cost per unit $ 32 Total $28,800 Total Cost of Goods exchange $ 45,600 11. On declination 31 of last year, Wolfson Corporation had in inventory 400 units of its product, which cost $21 per unit to produce. During January, the company produced 800 units at a cost of $24 per unit. Assuming that Wolfson Corporation sold 700 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? 4-11. Solution Wolfson Corporation Cost of goods sold on 700 units over-the-hill inventory Quantity (Units) 400 Cost per unit $ 21 Total $ 8,400 New inventory Quantity (Units) 300 Cost per unit $ 24 Total $ 7,200 Total Cost of Goods change $15,600 12.At the end of January, Lemon Auto Parts had an inventory of 825 units, which cost $12 per unit to produce. During February the company produced 750 units at a cost of $16 per unit. If the firm sold 1,050 units in February, what was its cost of goods sold? a. Assume LIFO inventory accounting. b. Assume FIFO inventory accounting. 4-12. Solution Lemon Auto Parts a. LI FO Accounting Cost of goods sold on 1,050 units New inventory Quantity (Units) 750 Cost per unit $ 16 Total $12,000 Old inventory Quantity (Units) 300 Cost per unit $ 12 Total $ 3,600 Total Cost of Goods Sold $15,600 b. FIFO Accounting Cost of goods sold on 1,050 units Old inventory Quantity (Units) 825 Cost per unit $ 12 Total $ 9,900 New inventory Quantity (Units) 225 Cost per unit $ 16 Total $ 3,600 Total Cost of Goods Sold $15,600 13. Convex mechanised Supplies produces a product with the following costs as of July 1, 2009 cloth$ 6 mash4 Overhead 2 $12 Beginning inventory at these costs on July 1 was 5,000 units. From July 1 to December 1, Convex produced 15,000 units. These units had a material cost of $10 per unit. The costs for labor and smash-up were the same. Convex uses FIFO inventory accounting. Assuming that Convex sold 17,000 units during the last six months of the year at $20 each, what would gross profit be? What is the value of ending inventory? 4-13. Solution Convex Mechanical Supplies Sales (17,000 $20) $340,000 Cost of goods sold Old inventory Quantity (units) 5,000 Cost per unit $ 12 Total $ 60,000 New inventory Quantity (units) 12,000 Cost per unit $ 16 Total $192,000 Total cost of goods sold $252,000 Gross profit $ 88,000 Value of ending inventory Beginning inventory (5,000 ( $12) $ 60,000 + Total production (15,000 ( $16) $240,000 Total inventory procurable for sale $300,000 Cost of good sold $252,000 Ending inventory $ 48,000 or 3,000 units ( $16 = $48,000 14. Assume in problem 13 that Convex used LIFO accounting instead of FIFO. What would gross profit be? What is the value of ending inventory? 4-14. Solution Convex Mechanical Supplies (Continued) Sales (17,000 $20) $340,000 Cost of goods sold New inventory Quantity (units) 15,000 Cost per u nit .. $ 16 Total .. $240,000 Old inventory Quantity (units) .. 2,000 Cost per unit .. $ 12 Total .. $ 24,000 Total cost of goods sold .. $264,000 Gross profit .. $ 76,000 Value of ending inventory Beginning inventory (5,000 ( $12) $ 60,000 + Total production (15,000 ( $16) .. $240,000 Total inventory available for sale .. $300,000 Cost of good sold .. $264,000 Ending inventory .. $ 36,000 OR 3,000 units ( $12 = $36,000 15. Jerrico Wallboard Co. had a beginning inventory of 7,000 units on January 1, 2008. The costs associated with the inventory were Material$9. 00 unit Labor5. 00 unit Overhead4. 10 unit During 2004, Jerrico produced 28,500 units with the following costs Material$11. 50 unit Labor4. 80 unit Overhead5. 20 unit Sales for the year were 31,500 units at $29. 60 each. Jerrico uses LIFO accounting. What was the gross profit? What was the value of ending inventory? 4-15. Solution Jer rico Wallboard Co. Sales (31,500 $29. 0) $932,400 Cost of goods sold New inventory Quantity (units) 28,500 Cost per unit $ 22. 50 Total $641,250 Old inventory Quantity (units) 3,000 Cost per unit $ 18. 0 Total $ 54,300 Total cost of goods sold $695,550 Gross profit $236,850 Value of ending inventory Beginning inventory (7,000 ( $18. 10) $126,700 + Total production $641,250 (28,500 ( $22. 50) Total inventory available for sale $767,950 Cost of good sold $695,550 Ending inventory $ 72,400 OR 4,000 units ( $18. 10 = $72,400 16. J.Los Clothiers has forecast credit sales for the fourth quarter of the year as family (actual)$70,000 quartern Quarter October$60,000 November55,000 December80,000 Experience has shown that 30 percent of sales are collected in the month of sale, 60 percent in the following month, and 10 percent are never collected. name a schedule of cash gain for J. Los Clothiers covering the fourth quarter (October through December). 4-16. Solution J. Los Clothiers September October November December Credit sales $70,000 $60,000 $55,000 $80,000 30% Collected in month of sales 18,000 16,500 24,000 60% Collected in month by and by sales 42,000 36,000 33,000 Total cash receipts $60,000 $52,500 $57,000 17.Victorias Apparel has forecast credit sales for the fourth quarter of the year as September (actual)$50,000 Fourth Quarter October$40,000 November35,000 December60,000 Experience has shown that 20 percent of sales are collected in the month of sale, 70 percent in the following month, and 10 percent are never collected. Prepare a schedule of cash receipts for Victorias Apparel covering the fourth quarter (October through December). 4-17. Solution Victorias Apparel September October November December Credit sales $50,000 $40,000 $35,000 $60,000 20% Collected in month of sales 8,000 7,000 12,000 70% Collec ted in month by and by sales 35,000 28,000 24,500 Total cash receipts $43,000 $35,000 $36,500 18. burglar Video Company has made the following sales projections for the next six months. All sales are credit sales. March$24,000June$28,000 April30,000July35,000 May18,000August38,000 Sales in January and February were $27,000 and $26,000, respectively.Experience has shown that of total sales, 10 percent are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected twain months after sale. Prepare a periodical cash receipts schedule for the firm for March through August. Of the sales expected to be made during the six months from March through August, how much will still be gather at the end of August? How much of this is expected to be collected later? 4-18. Solution Pirate Video Company gold advantage Schedule January February March April entered unit sales 4,000 10,000 8,000 6,0 00 +Desired ending inventory 15,000 12,000 9,000 Beginning inventory 6,000 15,000 12,000 Units to be produced 13,000 7,000 5,000 cash Payments Feb March April May Units produced 8,000 13,000 7,000 5,000 Materials ($7/unit) month after production $56,000 $91,000 $49,000 Labor ($3/unit) month of production 39,000 21,000 15,000 Fixed overhead 10,000 10,000 10,000 Dividends 14,000 Total exchange Payments $105,000 $122,000 $88,000 21. Dinas Lamp Company has forecast its sales in units as follows January 1,000 February 800 March 900 April 1,400 May 1,550 June 1,800 July 1,400 Dinas always keeps an ending inventory equal to 120 percent of the next months expected sales.The ending inventory for December (Januarys beginning inventory) is 1,200 units, which is consistent with this policy. Materials cost $14 per unit and are paid for in the month after purchase. Labor cost is $7per unit and is paid in the month the cost is incurred. Overhead costs are $8,000 per month. Interest of $10,000 is plan to be paid in March, and employee bonuses of $15,500 will be paid in June. Prepare a monthly production schedule and a monthly sum-up of cash payments for January through June. Dina produced 800 units in December. 4-21. Solution Dinas Lamp Company Production Schedule Jan. Feb. March April May June July Forecasted unit sales 1,000 900 1,400 1,550 1,800 1,400 + Desired ending inventory 960 1,080 1,680 1,860 2,160 1,680 Beginning inventory 1,200 960 1,080 1,680 1,860 2,160 = Units to be produced 760 920 1,500 1,580 1,850 1,320 Summary of property Payments Dec. Jan. Feb. March April May June Units roduced 800 760 920 1,500 1,580 1,850 1,320 Material cost ($14/unit) month after purchase $11,200 $10,640 $12,880 $21,000 $22,120 $25,900 Labor cost ($5/unit) month incurred 5,320 6,440 10,500 11,060 12,950 $9,240 Overhead cost 8,000 8,000 8,000 8,000 8,000 8,000 Interest 10,000 Employee bonu ses 15,500 Total bills Payments $24,520 $25,080 $41,380 $40,060 $43,070 $58,640 22. Graham Potato Company has intercommunicate sales of $6,000 in September, $10,000 in October, $16,000 in November, and $12,000 in December.Of the companys sales, 20 percent are paid for by cash and 80 percent are sold on credit. Experience, shows that 40 percent of accounts receivable are paid in the month after the sale, while the remaining 60 percent are paid two months after. Determine collections for November and December. Also assume Grahams cash payments for November and December are $13,000 and $6,000, respectively. The beginning cash balance in November is $5,000, which is the desired nominal balance. Prepare a cash budget with borrowing needed or repayments for November and December. (You will need to prepare a cash receipts schedule first. ) 4-22. Solution Graham Potato Company Cash benefit Schedule September October November December Sales $6,000 $10,000 $16,000 $12,000 Credi t sales (80%) 4,800 8,000 12,800 9,600 Cash sales (20%) 1,200 2,000 3,200 2,400 Collections in month after sales (40%) 3,200 5,120 Collections two months after sales (60%) 2,880 4,800 Total cash receipts $9,280 $12,320 Graham Potato Company (Continued) Cash calculate November December Cash receipts $ 9,280 $12,320 Cash payments 13,000 6,000 Net Cash Flow (3,720) 6,320 Beginning Cash equilibrate 5,000 5,000 Cumulative Cash labyrinthine sense 1,280 11,320 Monthly Loan or (Repayment) 3,720 (3,720) Cumulative Loan difference 3,720 -0- Ending Cash residue $ 5,000 $ 7,600 23. Juans taco Company has restaurants in five college towns. Juan wants to expand into Austin and College position and needs a bank loan to do this. Mr. Bryan, the banker, will finance construction if Juan can present an acceptable three-month financial plan for January through March. Following are actual and forecasted sales figures Actual Forecast Additional Information N ovember $120,000 January $190,000 April forecast $230,000 December 140,000 February 210,000 March 230,000 Of Juans sales, 30 percent are for cash and the remaining 70 percent are on credit. Ofcredit sales, 40 percent are paid in the month after sale and 60 percent are paid in the assist month after the sale. Materials cost 20 percent of sales and are paid for in cash.Labor spending is 50 percent of sales and is also paid in the month of sales. Selling and administrative expense is 5 percent of sales and is also paid in the month of sales. Overhead expense is $12,000 in cash per month depreciation expense is $25,000 per month. Taxes of $20,000 and dividends of $16,000 will be paid in March. Cash at the beginning of January is $70,000, and the minimum desired cash balance is $65,000. For January, February, and March, prepare a schedule of monthly cash receipts, monthly cash payments, and a complete monthly cash budget with borrowings and repayments. 4-23. Solution Juans T aco Company Cash gross Schedule November December January February March April Sales $120,000 $140,000 $190,000 $210,000 $230,000 $230,000 Credit sales (70%) 84,000 98,000 133,000 147,000 161,000 161,000 Cash sales (30%) 36,000 42,000 57,000 63,000 69,000 69,000 Collections (month after credit sales) 40% 33,600 39,200 53,200 58,800 64,400 Collections (two months after credit sales) 60% 50,400 58,800 79,800 88,200 Total Cash pass $146,600 $175,000 $207,600 4-23. (Continued)Juans Taco Company Cash Payments Schedule January February March Payments for Material Purchases (20% of current months sales) $ 38,000 $ 42,000 $46,000 Labor Expense (50% of sales) 95,000 105,000 115,000 Selling and Admin. Exp. 5% of sales) 9,500 10,500 11,500 Overhead 12,000 12,000 12,000 Taxes 20,000 Dividends 16,000 Total Cash Payments* $154,500 $169,500 $220,500 *The $25,000 of depreciation is excluded because it is not a cash expense. 4-23. (Continued) Juans Taco C ompany Cash Budget January February March Total Cash Receipts $146,600 $175,000 $207,600 Total Cash Payments 154,500 169,500 220,500 Net Cash Flow (7,900) 5,500 (12,900) Beginning Cash oddment 70,000 65,000 67,600 Cumulative Cash Balance 62,100 70,500 54,700 Monthly Loan or (repayment) 2,900 (2,900) 10,300 Cumulative Loan Balance 2,900 -0- 10,300 Ending Cash Balance $ 65,000 $ 67,600 $ 65,000 24. Hickman Avionicss actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September. Sales Purchases April (actual) $410,000 $220,000 May (actual) 400,000 210,000 June (forecast) 380,000 200,000 July (forecast) 360,000 250,000 August (forecast) 390,000 300,000 September (forecast) 420,000 220,000 The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, 20 percent are collected in the month after the sale and 80 percent are collected two months later. Hickman pays fo r 40 percent of its purchases in the month after purchase and 60 percent two months after. Labor expense equals 10 percent of the current months sales. Overhead expense equals $15,000 per month. Interest payments of $40,000 are due in June and September. A cash dividend of $20,000 is schedule to be paid in June. Tax payments of $35,000 are due in June and September. There is a scheduled capital outlay of $300,000 in September.Hickman Avionicss ending cash balance in May is $20,000. The minimum desired cash balance is $15,000. Prepare a schedule of monthly cash receipts, monthly cash payments, and a complete monthly cash budget with borrowing and repayments for June through September. The maximum desired cash balance is $50,000. Excess cash (above $50,000) is used to buy marketable securities. Marketable securities are sold originally borrowing funds in case of a cash shortfall (less than $15,000). 4-24. Solution Hickman Avionics Cash Receipts Schedule April May June July Aug. Sept . Sales $410,000 $400,000 $380,000 $360,000 $390,000 $420,000 Credit Sales (90%) 369,000 360,000 342,00 324,000 351,000 378,000 Cash Sales (10%) 41,000 40,000 38,000 36,000 39,000 42,000 Collections (month after sale) 20% 73,800 72,000 68,400 64,800 70,200 Collections (second month after sale) 80% 295,200 288,000 273,600 259,200 Total Cash Receipts $405,200 $392,400 $377,400 $371,400 4-24. (Continued) Hickman Avionics Cash Payments Schedule April May June July Aug. Sept. Purchases $220,000 $210,000 $200,000 $250,000 $300,000 $220,000 Payments (month after purchase40%) 88,000 84,000 80,000 100,000 120,000 Payments (second month after purchase60%) 132,000 126,000 120,000 150,000 Labor Expense (10% of sales) 38,000 36,000 39,000 42,000 Overhead 15,000 15,000 15,000 15,000 Interest Payments 40,000 40,000 Cash Dividend 20,000 Taxes 35,000 35,000 Capital Outlay 300,000 Total Cash Payments $364,000 $257,000 $274,000 $702,000 4-24. (Continued) Hickman Avionics Cash Budget June July August September Cash Receipts $405,200 $392,400 $377,400 $371,400 Cash Payments 364,000 257,000 274,000 702,000 Net Cash Flow 41,200 135,400 103,400 (330,600) Beginning Cash Balance 20,000 50,000 50,000 50,000 Cumulative Cash Balance 61,200 185,400 153,400 (280,600) Monthly Borrowing or (Repayment) *80,600 Cumulative Loan Balance 80,600 Marketable Securities Purchased 11,200 135,400 103,400 (Sold) 250,000 Cumulative Marketable Securities 11,200 146,600 250,000 Ending Cash Balance 50,000 50,000 50,000 50,000 *Cumulative Marketable Sec. (Aug)$250,000 Cumulative Cash Balance (Sept)280,600Required (ending) Cash Balance 50,000 Monthly Borrowing$80,600 25. Carter winder Company has plants in nine midwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of old years (and this will continue i n the future). All assets (including fixed assets) and current liabilities will vary this instant with sales. BALANCE SHEET (in $ millions) AssetsLiabilities and Stockholders Equity Cash$ 5Accounts payable$15 Accounts receivable15Accrued wages6 Inventory30Accrued taxes4 Current assets50 Current liabilities25 Fixed assets 40Notes payable30 everyday stock15 contain earnings 20 Total liabilities and Total assets$90 stockholders equity$90 Carter winder has an aftertax profit margin of 5 percent and a dividend payout ratio of 30percent. If sales grow by 10 percent next year, determine how many dollars of new funds are needed to finance the expansion. (Assume Carter Paint is already using assets at full capacity and that plant must be added. ) 4-25. Solution Carter Paint Company pic pic pic pic picpic pic 26. Jordan Aluminum Supplies has the following financial statements, which are representative of the companys historical average. Income dictation Sales$300,000 Expenses 247,000Earni ngs before interest and taxes$ 53,000 Interest 3,000 Earnings before taxes$ 50,000 Taxes 20,000 Earnings after taxes$ 30,000 Dividends$ 18,000 Balance Sheet AssetsLiabilities and Stockholders Equity Cash $ 8,000Accounts payable$ 6,000 Accounts receivable20,000Accrued wages2,000 Inventory62,000Accrued taxes4,000 Current assets$ 90,000 Current liabilities$ 12,000 Fixed assets 100,000Notes payable10,000 Long-term debt20,000 Common stock80,000 Retained earnings68,000 Total liabilities and Total assets $190,000 stockholders equity$190,000 Jordan is expecting a 20 percent increase in sales next year, and management is concerned about the companys need for extraneous funds.The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing stores. Among liabilities, only current liabilities vary directly with sales. utilise the percent-of-sales method, determine whether Jordan Aluminum has orthogon al financing needs. (Hint A profit margin and payout ratio must be found from the income statement. ) 4-26. Solution Jordan Aluminum Supplies pic Change in Sales = 20% ? $300,000 = $60,000 Spontaneous Assets = Current Asserts = Cash + Acc. Rec. + Inventory Spontaneous Liabilities = Acc. Payable + Accr. Wages + Accr. Taxes pic The firm needs $1,200 in external funds. 27. Cambridge Prep Shops, a national clothing chain, had sales of $200 million last year.The business has a steady net profit margin of 12 percent and a dividend payout ratio of 40 percent. The balance sheet for the end of last year is shown below. Balance Sheet End of Year (in $ millions) AssetsLiabilities and Stockholders Equity Cash$ 10Accounts payable$ 15 Accounts receivable15Accrued expenses5 Inventory50Other payables40 Plant and equipment 75Common stock30 Retained earnings 60 Total liabilities and Total assets$150 stockholders equity$150 Cambridges marketing staff tells the president that in this coming year there will be a large increase in the demand for tweed sport coats and various shoes. A sales increase of 15 percent is forecast for the Prep Shop.All balance sheet items are expected to maintain the same percent-of-sales relationships as last year*, except for common stock and retained earnings. No change is scheduled in the number of common stock shares outstanding, and retained earnings will change as dictated by the profits and dividend policy of the firm. (Remember the net profit margin is 12 percent. ) a. Will external financing be required for the Prep Shop during the coming year? b. What would be the need for external financing if the net profit margin went up to 14percent and the dividend payout ratio was increased to 70 percent? Explain. * This included fixed assets are the firm is at full capacity. 4-27. Solution Cambridge Prep Shops a. pic pic pic picA negative figure for required new funds indicates that an excess of funds ($3. 06 mil. ) is available for new investment. No ex ternal funds are needed. b. pic pic The net profit margin increased slightly, from 12% to 14%, which decreases the need for external funding. The dividend payout ratio increased tremendously, however, from 40% to 70%, necessitating more external f