A firm has the following balance sheet as of XX/XX/XX: Assets Liabilities and Equity Cash $100 Accounts payable $ 300 Accounts receivable 300 Long-term debt 800 Inventory 400 Equity 400 Plant 700 Retained earnings 0 $1,500 $1,500 ? Currently sales are $4,000 with a net profit margin of 15 percent. Management expects sales to increase to $5,000 and wants to determine if the

Question

firm will need external financing to cover this expansion. Construct a forecasted balance sheet for sales of $5,000 using the percent of sales technique of forecasting assets and liabilities that spontaneously vary with sales. If the firm needs funds, these funds may be acquired through a bank. If the firm has excess funds, they should be invested in marketable securities. Assume that cash does not increase with the increase in sales. If this assumption were not made, would your answer be different?

What will be an ideal response?

Answer 1

Forecasted balance sheet entries using the percent of sales:       Accounts receivable =    $300 x $5,000 = $375                                          $4,000       Inventory =   $400 x $5,000 = $500                        $4,000?       Accounts payable =   $300 x $5,000 = $375                                     $4,000?       Need for external finance =       ($700/$4,000)($1,000) ? ($300/$4,000)($1,000)          ? (.15)($5,000) = $175 ? 75 ? 750 = ($650)??       Balance Sheet as of 12/31/XX?               Assets                        Liabilities and Equity      Cash                          $  100   Accounts payable  $  375    Marketable securities     650      Accounts receivable      375   Long?term debt          800    Inventory                      500   Equity                       400    Plant & equipment        700   Retained earnings      750                                              $2,325                                          $2,325?In this problem the firm generates excess cash, which is invested in short?term marketable securities. Even if the cash increases proportionately with sales from $100 to $125, the firm would still have excess funds. (Marketablesecurities would be $625.)