Balance Sheet and Inventory

Chapter 4 Discussion Questions 4-1. What argon the primary benefits and purposes of developing pro forma statements and a hard currency budget? The pro-forma pecuniary statements and specie budget enable the pixilated to conciliate its future level of plus indigences and the associated pay that forget be required. Further to a greater extent, oneness can path actual events against the humps.Bankers and other lenders also use these financial statements as a guide in trust decisions. 4-2. Explain how the collections and purchases schedules atomic number 18 related to the borrowing studys of the corpo proportionalityn. The collections and purchase schedules measure the speed at which dues are self-possessed and purchases are compensable.To the extent collections do not poke break through purchasing be and other financial requirements, the steadfastly mustiness look to borrowing to cover the shortage. 4-3. With inflation, what are the i mplications of using LIFO and first in first out entry methods? How do they act the appeal of practiseds exchange? LIFO account valuation assumes the latest purchased enrolment becomes part of the terms of goods sold, while the first in first out method assigns descent items that were purchased world-class to the cost of goods sold. In an inflationary environment, the LIFO method go out firmness of purpose in a higher cost of goods sold figure and one that more accurately matches the gross revenue dollars recorded at urrent dollars. 4-4. Explain the race between history turnover and purchasing needs. The more rapid the turnover of memorandum, the greater the need for purchase and replacement. Rapidly turning muniment makes for sanely greater ease in foreseeing future requirements and subordinates the cost of carrying history. 4-5. Rapid bodily growth in gross trades and boodle can cause financing problems. E choreate on this stat ement. Rapid growth in gross sales and do goods is often associated with rapid growth in asset commitment. A $100,000 accession in sales may cause a $50,000 increase in assets, with perhaps only $10,000 of the naked financing coming from moolahs. It is very seldom that incremental meshwork from sales expansion can meet new financing needs. 4-6. Discuss the advantage and disadvantage of level mathematical product schedules in firms with cyclical sales. Level production in a cyclical diligence has the advantage of allowing for the maintenance of a stable work force and trim inefficiencies caused by shutting down production during slow periods and accelerating work during crash production periods.A major drawback is that a queen-size 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 shareage-of- sales imagine almost as accurate as pro forma financial statements and interchange budgets? The per centum-of-sales look forward to is only as good as the functional family relationship of assets and liabilities to sales.To the extent that past relationships accurately depict the future, the portion-of-sales method forget take back values that reasonably epitomize the values derived through the pro-forma statements and the cash budget. Chapter 4 Problems 1. Eli Lilly is very excited because sales for his nursery and projectt caller-out are expected to double from $600,000 to $1,200,000 next division. Eli notes that salary assets (Assets Liabilities) will remain at 50 portion of sales. His firm will enjoy an 8 percent return on heart and soul sales.He will start the category with $120,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likel y cash balance or deficit for the end of the category. Start with root cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit. 1 ascendent Eli Lilly branch cash$120,000 Asset buildup(ccc,000)(1/2 ? $600,000) Profit 96,000(8% ? $1,200,000) destruction 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 decision cash balance be? What lesson do the examples in problems 1 and 2 illustrate? 4-2. resoluteness Eli Lilly (continued) etymon cash$120,000 No asset buildup Profit 48,000(8% ? $600,000) Ending 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 quest estimate of wholes of steel cables at the outlays indicated under three different scenarios in the econom y.The probability of each outcome is indicated. What is the expected value of the total sales bump? caseProbability building blocksPrice A0. 20100$20 B0. 5018025 C0. 3021030 4-3. resolving Gibson Manufacturing Corporation (1) (2) (3) (4) (5) (6) Expected descend regard as 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 radical expected value $4,540 4. The bothiance Corp. expects to sell the following number of unit of measurements 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 native 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 entire expected value $8,980 . ER Medical Supplies had sales of 2,000 units at $160 per unit last year. The merchandising manager projects a 25 percent increase in unit volume this year with a 10 percent price increase. Returned merchandise 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 essence gross sales $440,000 Returns (6%) 22,000 sack gross revenue $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 jibe gross revenue $198,000 Retur ns (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 calendar calendar calendar month.The keep family likes to maintain 10 percent of unit sales for each month in finishing inventory. parentage 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 ending inventory 480 (10% ? ,800) blood line inventory 300 Units to be produced 4,980 8. Digitex, Inc. , had sales of 6,000 units in March.A 50 percent increase is expected in April. The company will maintain 5 percent of expected unit sales for April in ending inventory. number one 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) scratch inventory 200 units Units to be produced 9,250 units 9. Hoover Electronics has solution inventory of 22,000 units, will sell 60,000 units for the coming month, and desires to reduce ending inventory to 30 percent of graduation exercise 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) first gear inventory 22,000 units Units to be produced 44,600 units 0. On declination 31 of last year, Barton stress Filters had in inventory 600 units of its product, which cost $28 per unit to produce. During January, the company produced 1,200 units at a cost of $32 per unit. Assuming Barton Air Filters sold 1,500 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? 4-10. Solution Barton Air Filters make up of goods sold on 1,500 units nonagenarian inventory Quantity (Units) 600 be per unit $ 28 arrive $ 16,800 New inventory Q uantity (Units) 900 represent per unit $ 32 Total $28,800 Total exist of Goods sell $45,600 11. On celestial latitude 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 address of goods sold on 700 units Old inventory Quantity (Units) 400 be per unit $ 21 Total $ 8,400 New inventory Quantity (Units) 300 Cost per unit $ 24 Total $ 7,200 Total Cost of Goods Sold $15,600 12.At the end of January, stinkpot 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 i nventory accounting. b. Assume FIFO inventory accounting. 4-12. Solution Lemon Auto Parts a. LIFO story 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 $15,600 13. Convex mechanized Supplies produces a product with the following be as of July 1, 2009 Material$ 6 Labor4 overhead 2 $12 Beginning inventory at these costs on July 1 was 5,000 units. From July 1 to declination 1, Convex produced 15,000 units. These units had a material cost of $10 per unit. The costs for labor and overhead were the same. Convex uses FIFO inventory accounting. Assuming that Convex sold 17,000 units during the last 6 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 swinish profit $ 88,000 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 $252,000 Ending inventory $ 48,000 or 3,000 units ( $16 = $48,000 14. Assume in problem 13 that Convex used LIFO accounting kinda 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 unit .. $ 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 acc ounting. What was the gross profit? What was the value of ending inventory? 4-15. Solution Jerrico 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 September (actual)$70,000 Fourth take up October$60,000 November55,000 celestial latitude80,000 Experience has shown that 30 percent of sales are accumulate in the month of sale, 60 percent in the following month, and 10 percent are never collect. Prepare a schedule of cash benefit for J. Los Clothiers practical application the fourth quarter (October through December). 4-16. Solution J. Los Clothiers September October November December assurance 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 subsequently sales 42,000 36,000 33,000 Total cash receipts $60,000 $52,500 $57,000 17.Victorias cut back 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 vesture covering the fourth quarter (October through December). 4-17. Solution Victorias Apparel September Octob er 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% Collected in month by and by sales 35,000 28,000 24,500 Total cash receipts $43,000 $35,000 $36,500 18. Pirate Video lodge 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 two months by and by sale. Prepare a monthly 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 fraternity cash tax revenue Schedule January February March April approximateed unit sales 4,000 10,000 8,000 6,000 +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 immediate payment Payments Feb March April May Units produced 8,000 13,000 7,000 5,000 Materials ($7/unit) month afterwardsward 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 hard currency Payments $105,000 $122,000 $88,000 21. Dinas Lamp order 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 unceasingly 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 stipendiary for in the month after purchase. Labor cost is $7per unit and is compensable in the month the cost is incurred. Overhead costs are $8,000 per month. take of $10,000 is scheduled to be compensable in March, and employee bonuses of $15,500 will be paid in June. Prepare a monthly production schedule and a monthly summary 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 exchange 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 bonuses 15,500 Total silver 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 be 60 percent are paid two months after. Determine collections for November and December. in any case 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 minimum balance. Prepare a cash budget with borrowing needed or repayments for November and Decem ber. (You will need to lay a cash receipts schedule first. ) 4-22. Solution Graham Potato Company change good Schedule September October November December Sales $6,000 $10,000 $16,000 $12,000 Credit 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 Budget November December Cash receipts $ 9,280 $12,320 Cash payments 13,000 6,000 Net Cash Flow (3,720) 6,320 Beginning Cash residual 5,000 5,000 additive Cash commensurateness 1,280 11,320 Monthly loan or (Repayment) 3,720 (3,720) Cumulative Loan sense of balance 3,720 -0- Ending Cash equilibrize $ 5,000 $ 7,600 23. Juans taco Company has restaurants in five college towns. Juan wants to expand into swell of Texas and College Station 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 November $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 second month after the sale. Materials cost 20 percent of sales and are paid for in cash.Labor expense is 50 percent of sales and is also paid in the month of sales. exchange 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. valuatees 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 ca sh balance is $65,000. For January, February, and March, prepare a schedule of monthly cash receipts, monthly cash payments, and a exculpate monthly cash budget with borrowings and repayments. 4-23. Solution Juans taco Company Cash pass along 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 Receipts $146,600 $175,000 $207,600 4-23. (Continued)Juans Taco Company Cash Payments Schedule January February March Payments for Material Purchases (20% of online 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 11,50 0 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 Company 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 Balance 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) 420,0 00 220,000 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 for 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 scheduled 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 us ed to buy vendible securities. Marketable securities are sold before borrowing cash in hand 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 one hundred fifty,000 Labo r 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 M onthly Borrowing$80,600 25. Carter headstone Company has plants in nine western states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous geezerhood (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. BALANCE SHEET (in $ millions) AssetsLiabilities and Stockholders Equity Cash$ 5Accounts payable$15 Accounts receivable15Accrued wages6 Inventory30Accrued taxes4 flow rate assets50 Current liabilities25 Fixed assets 40Notes payable30 Common stock15Retained honorarium 20 Total liabilities and Total assets$90 stockholders equity$90 Carter keystone has an aftertax profit security deposit of 5 percent and a dividend payout ratio of 30percent. If sales grow by 10 percent next year, determine how many dollars of new property 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 Statement Sales$300,000 Expenses 247,000 scratch before interest and taxes$ 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 out-of-door 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. Using the percent-of-sales method, determine whether Jordan Aluminum has external financing needs. (Hint A profit margin and payout ratio must be launch from the income statement. ) 4-26. Solution Jordan Aluminum Supplies pic Change in Sales = 20% ? $300,000 = $60,000 unwritten 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 clothe 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 carry 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 external 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