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.
Question 1: If the firm expects sales of $25,000, what are the forecasted levels of the balance sheet items above?
Question 2: Will the expansion in accounts payable cover the expansion in inventory and accounts receivable?
Question 3: 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?
Question 4: 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.