http://www.chegg.com/homework-help/managerial-accounting-15th-edition-chapter-14

Question

http://www.chegg.com/homework-help/managerial-accounting-15th-edition-chapter-14-problem-12p-solution-9780078025631

These questiosn are in response to the solution from the link above

Management plans to increase sales in the future; to support this increase in sales, it plans to add $200,000 to inventory. They did not disclose a sales forecast. It is not unusual for a new company to experience low cash flows during its start-up phase. What could be some sources to finance the acquisition of inventory? Would most suppliers finance the inventory for a new company?

How are sales to be budgeted or forecast? Is the lack of supporting documentation for the increase in sales a problem? Have they considered additional advertising, and hiring more sales people, for example?

An increase in sales means resources also for inventory and accounts receivable. Have they considered the cash for these resources? Many companies minimize these resources expenditures.

Should management seek outside funding for the expansion of inventory? If so, should the financing be debt, where an investor gives cash for interest payments, or should it be equity, assuming the investor will give $200,000 for a 10% interest in the company?

Explanation / Answer

It is not unusual for a new company to experience low cash flows during its start up phase. The statement is correct. There are many sources to finance the acquisition of inventory such as by accounts receivable financing beacuse its quite cheaper and easy to use . One can also go for asset based lending or take low interest business loans. Usually suppliers dont finance the inventory for a new company. Even if they do there are many terms and condition put by them.

Sales can be budgeted by predicting the market needs for the product, Willingness of people to buy th ebproduct. Yes , lack of supporting documentation for the increase in sales is a problem.

For the expansion of inventory the management should better prefer financing by debt and give cash for intyerest payments.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.