Question: A firm with sales of $5,000 has the following balance sheet:
|
Assets, Liabilities and Equity as of xx/xx/xx
|
|
Assets
|
Liabilities and Equity
|
|
Accounts receivable
|
$1,300
|
Accounts payable
|
$1,200
|
|
Inventory
|
1,600
|
Long-term debt
|
2,500
|
|
Plant
|
1,700
|
Equity
|
900
|
|
Total
|
$4,600
|
Total
|
$4,600
|
The firm earns 20 percent on sales and expects those sales to rise to $5,500. The increased sales may require additional financing. Accounts receivable and inventory will increase, and trade accounts will also spontaneously increase with the increase in sales. Management expects to distribute 75% of earnings.
a. Determine the new balance sheet entries for those assets and liabilities that spontaneously change with the level of sales using the percent of sales technique. (Accounts receivable, inventory, and accounts payable vary with sales; the other entries do not). Round off to nearest percentage point, such as 22% or .22.
b. Will the firm need external financing to achieve sales of $5,500?
c. Construct the pro forma balance sheet for sales of $5,500. Any new financing should be obtained by issuing new long-term debt. Any excess funds should be held in cash.