Question

Question 2 (50 points in total) Question based on modified problems 4.3 from the reference text [Flynn (2009)] from page 135 of the textbook: Create a balance sheet template and prepare a balance sheet for the company at the end of two years of operation (30 points): a. The company has gross sales of $48 million per year and the pattern of sales is even, i.e. there is no cyclical pattern to sales. b. Customers are large firms with a typical payment pattern of every 45 days. c. COGS covers material only and takes 60%; labour costs are in SG&A; d. Monthly payroll is $200,000, paid biweekly e. There are enough raw materials on hand to support one month of manufacturing; two months of actual production of finished goods are in the warehouse. f. The company pays its suppliers 30 days after goods are received. g. The owners started the business with an initial capital injection of $5.6 million 25 months ago. h. The owners borrowed $3 million of long-term debt with the principal repayment in 10 equal annual payments (assume the principal repayment on debt has been made for year 2) i. The company purchased $8 million assets with a depreciation period of 10 years j. In the first two years of the business, the company had a cumulative net income of $1,800,000 and paid dividends of $300,000 (S150,000 per year) to the owners k. The company has a short-term credit line that runs positive or negative based on the fluctuations of the business. Please answer the question below by using this balance sheet: 1. What current assets and fixed asset does the company have? Which is larger? (4 points) 2. How much short term debt does the company have? (3 points) 3. How much working capital does the company have? (3 points) 4. If the cumulative dividend over two years had been $1,800,000 instead of $300,000 (if all the profits had been taken out of the business as dividends), what would the short-term debt be? Would working capital still be positive? (5 points) 5. If you cut the inventory in half by a vigorous program of just in time manufacturing and shipping, by how much would your short term debt drop? Would the working capital change? How about the working capital ratio? (5 points)

Answer 1

	ANSWERS
	In the Books of
	Balance Sheet
		(in $ Millions)
	Particulars	Amount	Amount
	Equity and Liabilities
	Capital		5.6
	Retained Earnings	18
	Less: Dividend Paid	3	15
	Long Term Debts		2.4
	Creditors		2.4
	Dividends Payable		3
			28.4
	Assets
	Assets	8
	Less: Accumulated Depreciation	1.6	6.4
	Debtors		6
	Stock of Raw Materials		2.4
	Stock of Finished Goods		8
	Cash & Bank (Balancing Figure)		5.6
			25.4
1	Current Assets
	Debtors		6
	Stock of Raw Materials		2.4
	Stock of Finished Goods		8
	Cash & Bank		5.6
			22
	Fixed Assets		6.4
2	Short Term Debt
	Creditors		2.4
	Dividend Payable		3
			5.4
3	Working Capital
	Current Assets		25.4
	Less: Current Liabilities		5.4
			20
4	Short Term Debts
	Creditors		2.4
	Dividend Payable		18
			20.4
5	Change in working Capital
	New Working Capital		11.4
	Old Working Capital		20
	Change in working Capital		-8.6
	Working Capital Ratio
	= Current Assets	=	16.8
	Current Liabilities		5.4
		=	3.11111