EEM, Inc. has the following balance sheet: EEM, Incorporated Balance Sheet as of
ID: 2646233 • Letter: E
Question
EEM, Inc. has the following balance sheet:
EEM, Incorporated Balance Sheet as of 12/31/X0
Assets Liabilities and Equity
Cash $1,000 Accounts payable $ 5,300
Accounts receivable 7,200 Bank note payable 3,200
Inventory 6,100
Long-term assets 4,200 Equity 10,000
$18,500 $18,500
It has estimated the following relationships between sales and the various assets and liabilities that vary with the level of sales:
Accounts receivable = $3,310 + 0.35 Sales,
Inventory = $2,264 + 0.28 Sales,
Accounts payable = $1,329 + 0.22 Sales.
a. If the firm expects sales of $25,000, what are the forecasted levels of the balance sheet items above?
b. Will the expansion in accounts payable cover the expansion in inventory and accounts receivable?
c. If the firm earns 12 percent on sales after taxes and retains all of these earnings, will it cover its estimated needs for short-term financing?
d. Construct a new balance sheet that incorporates the issuing of additional short-term debt to cover any needs for additional finance. Assume cash remains $1,000.
Explanation / Answer
a. Forecasted
receivables = 3310 + 0.35 x 25000 = 12060
inventory = 2264 + 0.28 x 25000 = 9264
payable = 1329 + 0.22 x 25000 = 6829
b. Expansion in accounts payable (liability) < Expansion in inventory & receivables (assets)
therefore, additional payables will cover the additional inventory & receivable
c. Post-tax earnings = 12% of sales = 12% x 25000 = 3000
It's short term financing (or working capital requirement, defined as current assets over current liabilities) = inventory + receivables + cash - bank notes payable - accounts payable
= 9264 + 12060 + 1000 - 3200 - 6829 = 12295
Which is much higher than post tax earnings. So earnings is insufficient.
d. Revised balance sheet:
Inventory 9264 Receivables 12060 Cash 1000 Current assets 22324 long term asset 4200 total asset 26524 Bank note payable 3200 accounts payable 6829 Short term debt 6495 total liabilities 16524 equity 10000 equity + liabilities 26524Related Questions
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