I am very lost on how to get the answers to this problem, if anybody could expla
ID: 2613587 • Letter: I
Question
I am very lost on how to get the answers to this problem, if anybody could explain the formula/how to figure out the problem below, I would be very grateful.
1. Tarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics. Tarheel expects to earn $1 million after tax on the venture during the first year. The president of Tarheel wants to know what the subsidiary’s balance sheet would look like. The president believes that it would be advisable to begin the new venture with ratios that are similar to the industry average. Tarheel plans to make all sales on credit. All calculations assume a 365-day year. In your computations, you should round all numbers to the nearest $1,000. Based upon the industry average financial ratios presented here, complete the projected balance sheet for Tarheel’s upholstery subsidiary.
Industry Averages Current ratio 2:1
Quick ratio 1:1
Net profit margin ratio 5 percent
Average collection period 20 days
Debt ratio 40 percent
Total asset turnover ratio 2 times
Current liabilities/stockholders’ equity 20 percent
Forecasted Upholstery Subsidiary Balance Sheet
Cash
Total current liabilities
Accounts receivable
Long-term debt
Inventory
Total debt
Total current assets
Stockholders’ equity
Net fixed assets
Total liabilities and stockholders’ equity
Total assets
Explanation / Answer
Details $'000 Net Profit 1,000 Net Profit Margin 5% Sales 20,000 Average Collection period 20 days Average Accounts receivable 1,096 Total assets Turnover ratio 2 Total assets 10,000 Debt ratio 40% Total debt =10000*40% = 4,000 Current Asset/Current Liab 2 Current Asset =2*Current Liab Quick ratio 1 (Current Asset-Inventory)/Current Liab 1 CA-INV CA/2 Inventory CA/2 Current Liab/Equity 20% Current Liab 0.20*Equity Total Liab =+Current Liab+ Total Debt+Equity = Total Debt +1.2 Equity =4000+1.2 Equity Total assets = Total Liability 10000 = 4000+1.2 Equity Equity = 5000 Current Liability = 1000 Current Asset = 2000 Inventory = 1000 AR+Cash+Inventory = 2000 Cash = -96 Fixed asset net 8000 Required Balance sheet Amt $'000 Cash -96 Total current liabilities 1000 Accounts receivable 1096 Long-term debt 4000 Inventory 1000 Total debt 4000 Total current assets 2000 Stockholders’ equity 5000 Net fixed assets 8000 Total liabilities and stockholders’ equity 10000 Total assets 10000
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