total liabilties Suppose that the treasurer of J. Washam targets a cash burn rat
ID: 2771650 • Letter: T
Question
total liabilties
Suppose that the treasurer of J. Washam targets a cash burn rate of 250 days for the firm in the year 2012.
a) Assuming that COGS are expected to remain unchanged from 2011, then what change (increase or decrease) in cash would be warranted?
B) Assuming that cash holdings will remain unchanged from 2011, then what change (increase or decrease) in COGS would be warranted.
Balance Sheet 2007 2008 2009 2010 2011 Cash / Equivlants 75 75 90 100 100 Accounts Receivable 300 400 600 550 500 Inventory 150 250 350 250 250 Net Fixed Assets 525 575 610 540 465 Total Assets 1050 1300 1650 1440 1315 Accounts Payable 125 175 250 225 200 Notes Payable 165 162 178 136 99 Accured operating Exp. 60 161 165 89 76 Long term-debr 500 400 300 100 50 stockholders equity 200 402 757.2 890.2 890.2total liabilties
1050 1300 1650 1440 1315Explanation / Answer
We prepare our income statements based on accrual concept. That means COGS shown in the income statement is not a cash expense but an expense incurred during the year. A reduction in COGS does not mean that cash expense has been reduced. Even though for falling COGS, we have higher cash payments. Therefore, the company should be warranted for change in cash payment for COGS. We can see cash holdings are very low in comparison of COGS. That means if the company has to pay for COGS, it won’t be able to pay and will fall into short term crisis. Therefore, company should be warranted to increase the cash holdings. Obviously they need to have extra cash for increase in COGS.
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