Question

Problem SFP4-2 FINANCIAL PLANNING AND GROWTH CONSIDERATIONS Clueless, Inc. Balance Sheet at 12/31/2019 (000's) Cash & Marketable Securities 60 Accounts Payable 50 Accounts Receivable 111 Long-Term Debt 293 Inventories 150 Total Liabilities 343 Total Current Assets 321 Common Stock 145 Net Fixed Assets 250 Retained Earnings 83 Total Assets 571 Total Liabilities and Capit 571 Additional considerations: Sales for 2019 were $1,000,000; Net Income after Tax = $60,000 Management's estimates for the next years: Sales growth @30% for 2020 Net Income after Taxes estimated at 6% of Sales Proposed Dividend distribution = 40% of after-tax profits Proposed Debt to Assets ratio = 60% Projected Year-End Cash Balance = 6% of Sales Projected Year-End Accounts Receivable Duration = 40 days Projected levels of Inventory = 15% of Sales Projected Accounts Payable levels = 5% of Sales Projected level of Net Fixed Assets = 25% of Sales No projected changes in the levels of Common Stock are proposed Required: Prepare a 2020 projected Income Statement, Balance Sheet and Statement of Cash Identify implications of excessive growth expectations upon capital structure Calculate a more responsible level of growth to avoid financial distress

Answer 1

Clueless, Inc. Projected Balance Sheet (or) Statement of Financial Position as at December 31, 2020 Particulars Amount in 000 EQUITY & LIABILITIES Shareholders' Funds Common Stock Retained Earnings Add: Profit transferred from Income Statement $145.00 $83.00 $46.80 Non-Current Liabilities Long Term Debt $444.28 Debt to Assets Ratio of 60% Current Liabilities Accounts Payable $65.00 5% of Sales TOTAL $784.08 ASSETS Non-Current Assets Net Fixed Assets $325.00 25% of Sales Current Assets Cash & Marketable Securities Accounts Receivable Inventories $78.00 6% of Sales $142.47 40 days Receivable Duration $195.00 15% of Sales TOTAL $740.47 DIFFERENCE -$43.61

Clueless, Inc. Income Statement for the year ended December 31, 2020 Particulars Amount in 000 Sales COGS & Taxes $1,300.00 $1,222.00 Net Income after Taxes 6% of Sales $78.00 Dividend Distribution 40% of After Tax Profits $31.20 Balance transferred to Retained Earnings $46.80

Clueless, Inc. Cash Flow Statement for the year ended December 31, 2020 Net Profit for the Year $78.00 Add/Less: Changes in Working Capital + Increase in Accounts Payable Increase in Accounts Receivable Increase in Inventory $15.00 $31.47 $45.00 A Cash Flow from Operating Activities $16.53 Increase in Net Fixed Assets $75.00 B Cash Flow from Investing Activities $75.00 + Increase in Long Term Debt Payment of Dividends $151.28 $31.20 с Cash Flow from Financing Activities $120.08 A+B+C Net Cash Inflow/Outflow) $61.61 Opening Cash Balance Closing Cash Balance $60.00 $121.61 Actual Required Closing Balance $78.00 DIFFERENCE $43.61

OPTION 1:

It can be understood that the business is over leveraged with unused debt.

The Business has over $ 43 Thousand dollars debt in excess of requirements.

Hence, we recommend to reduce the Debt to Asset ratio to a more reasonable level.

Clueless, Inc. Revised Projected Balance Sheet (or) Statement of Financial Position as at December 31, 2020 Particulars Amount in 000 EQUITY & LIABILITIES Shareholders' Funds Common Stock Retained Earnings Add: Profit transferred from Income Statement $145.00 $83.00 $46.80 Non-Current Liabilities Long Term Debt $400.67 54% (Debt to Assets Ratio) Current Liabilities Accounts Payable $65.00 5% of Sales TOTAL $ 740.47 ASSETS Non-Current Assets Net Fixed Assets $325.00 25% of Sales Current Assets Cash & Marketable Securities Accounts Receivable Inventories $78.00 6% of Sales $142.47 40 days Receivable Duration $195.00 15% of Sales TOTAL $ 740.47 DIFFERENCE $0.00

OPTION 2:

Another view that can be taken is to maintain the Debt to Assets Ratio and Set a higher Sales Target

If Sales had grown at 60.75% the Level of Debt to Asset ratio could have been maintained.

Clueless, Inc. Projected Balance Sheet (or) Statement of Financial Position as at December 31, 2020 Particulars Amount in 000 EQUITY & LIABILITIES Shareholders' Funds Common Stock Retained Earnings Add: Profit transferred from Income Statement $145.00 $83.00 $57.87 Non-Current Liabilities Long Term Debt $549.37 Debt to Assets Ratio of 60% Current Liabilities Accounts Payable $80.38 5% of Sales TOTAL $915.61 ASSETS Non-Current Assets Net Fixed Assets $401.88 25% of Sales Current Assets Cash & Marketable Securities Accounts Receivable Inventories $96.45 6% of Sales $176.16 40 days Receivable Duration $241.13 15% of Sales TOTAL $915.61 DIFFERENCE $0.00

Clueless, Inc. Income Statement for the year ended December 31, 2020 161% Particulars Amount in 000 Sales COGS & Taxes $1,607.50 $1,511.05 Net Income after Taxes 6% of Sales $96.45 Dividend Distribution 40% of After Tax Profits $38.58 Balance transferred to Retained Earnings $57.87

Clueless, Inc. Cash Flow Statement for the year ended December 31, 2020 Net Profit for the Year $96.45 Add/Less: Changes in Working Capital + Increase in Accounts Payable Increase in Accounts Receivable Increase in Inventory $30.38 -$65.16 $91.13 A Cash Flow from Operating Activities -$29.46 Increase in Net Fixed Assets $151.88 B Cash Flow from Investing Activities $ 151.88 + Increase in Long Term Debt Payment of Dividends $256.37 $38.58 с Cash Flow from Financing Activities $217.79 A+B+C Net Cash Inflow/Outflow) $36.45 Opening Cash Balance Closing Cash Balance $60.00 $96.45 Actual Required Closing Balance $96.45 DIFFERENCE $0.00