Question

Consider the following potential events that might have occurred to Global on December​ 30, 2016. For each​ one, indicate which line items in​ Global's balance sheet would be affected and by how much. Also indicate the change to​ Global's book value of equity.

a. Global used $ 20.6 million of its available cash to repay $ 20.6 million of its​ long-term debt.

b. A warehouse fire destroyed $ 4.7million worth of uninsured inventory.

c. Global used $ 5.3 million in cash and $ 5.1 million in new​ long-term debt to purchase a $ 10.4 million building.

d. A large customer owing $2.9 million for products it already received declared​ bankruptcy, leaving no possibility that Global would ever receive payment.

e. ​Global's engineers discover a new manufacturing process that will cut the cost of its flagship product by more than 53 %

f. A key competitor announces a radical new pricing policy that will drastically undercut​ Global's prices.

Answer 1

	a	Long term debt	($20,600,000)	Decrease
		Cash	($20,600,000)	Decrease
		Book value of Equity	No Change
	b	Inventory	($470,000)	Decrease
		Loss on inventory write-off	$470,000	increase
		Book Value of Equity	Decrease	Retained Earnings will be decreased
	c	Fixed assets	$10,400,000	Increase
		Cash	($5,300,000)	Decrease
		Long Term debt	$5,100,000	Increase
		Book value of Equity	No Change
	d	Bad debts	$2,900,000	Increase
		Accounts Receivable	($2,900,000)	Decrease
		Book Value of Equity	Decrease	Retained Earnings will be decreased
	e	Cost of goods sold	Decrease
		Gross Profit	Increase
		Book value of Equity	Increase	Retained Earnings will be increased
	f	Sales revenue	Decrease
		Gross profit	Decrease
		Book Value of Equity	Decrease	Retained Earnings will be decreased