Question

Q3. a) Big Auto Part Inc. is authorized to issue 5,000,000 common shares. In its initial public offering during 2015, Big Parts issued 500,000 common shares for $7.00 per share. Over the next year, Big Auto Part's share price increased and the company issued 400,000 more shares at an average price of $8.50 During the five years from 2015 through 2019, Big Auto Part eamed net income of $920,000 and declared and paid cash dividends of $140,000. A 10% stock dividend was distributed to the shareholders in 2015 on the shares outstanding. The market price was $8.00 per share when the stock dividend was distributed. At December 31, 2019, the company has total assets of $14,500,000 and total liabilities of $6,820,000. Requirement: Show the computation of Big Auto Part's total shareholders' equity at December 31, 2019. Present a detailed computation of each element of shareholders' equity. b) Identify and briefly describe four ways to improve cash flows from sales and receivables

Answer 1

a. In the absense of Par value of shares we are not going to bifurcate the Common Stock into Shares Issued and APIC (Additional Paid in Capital). Due to lack of Par value we will be considering both the figure into common stock.

1. Statement of Stockholder's Equity -

Big Auto Part Inc. Statement of Stockholder's Equity At December 31, 2019 Stockholder's Equity Common Stock $7,300,000 $ 7,300,000 Retained Earnings Add: Net Income Less: Dividends Less: Stock Dividends $ 920,000 $ (140,000) $ (400,000) $ 380,000 Total Stockholder's Equity $ 7,680,000

2. If we consider Par Value as $7 per share.

Big Auto Part Inc. Statement of Stockholder's Equity At December 31, 2019 Stockholder's Equity Common Stock, $7 Par Value $6,650,000 Additional Paid In Capital in Excess of Par - Common $ 650,000 $ 7,300,000 Retained Earnings Add: Net Income Less: Dividends Less: Stock Dividends $ 920,000 $ (140,000) $ (400,000) $ 380,000 Total Stockholder's Equity $7,680,000

b. To improve cash flow from accounts receivables -

1. Company needs to track accounts receivables time to time and collect the amount due to them on or before time. Company needs to set up tracking system or reminders to the receivables to avoid delays in collections.

2. Invoices issued to the customers should be very clear with respect to Invoice Value, Due Dates, Payment Terms, Dates of Invoice, Both the party address. These details provide support to the company to send reminders once they miss due dates.

3. Multiple Payment options - One of the best way to collect funds from the customer is to give them number of options to pay. It help them to choose easy way for them to pay on time, also if they are making the delay in payments we can ask them to choose them other options.

4. Options to past due customers - Those customers who are past due from years, company needs to send them reminders on timely basis, also company needs to offer them for discounts for full payment at time.

5. Payment before due dates discounts - Those customers who pays their dues on time every times for those company needs to offer some incentives.