You know the following things about a distribution business COGS for the busines

Question

You know the following things about a distribution business COGS for the business is the purchase cost of goods; no other items go into COGS The contribution margin for the business is 25% As a result of careful credit checks, bad debt is insignificant. Monthly sales are steady at $3 million per month. The business "floats" on a short term credit line and has no cash or short term investments on hand Prepaids and accrued expenses are negligible There are no taxes payable . The long term debt had an original value of $500,000 with a straight line principal repayment over a ten year period; the debt is less than ten years old .Receivables are running 52 days Inventory is 67 days of sales. (Note: This company measures inventory value based on the sales level) Suppliers are faithfully paid on "net 30 days" terms A) If the agreement with the short term lender specified that the working capital ratio had to be a minimum of two, what is the maximum amount of money the company could draw (borrow) on its short term line? Assuming the company has borrowed this much money on the short ternm line, complete the current assets and current liabilities portion of the balance sheet. B) What is the Quick Ratio (also called the Acid Test) for this company? Quick ratio (Current assets -Inventories)/Current liabilities C) Can you complete a full balance sheet for this company with the following listed items? If yes, do so. If not, show what information is missing by placing an X in those spots

Explanation / Answer

Assets Liabilities

Current Assets Current Liabilities

Cash x Short term credit line x

Receivables 427397 Accounts Payable 184932

($3m*52/365) ($3m*75%*30/365)

Inventory 550685 Taxes Payable x

($3m *67/365) Current portion of LT Debt 50000

Prepaid Expenses x   

Fixed Assets 500000 Long term debt 450000

Land, Bld, Equip @ cost Shareholders Equity

Less: Acc Dep.(500000/10) 50000 Capital Shares x

Net 450000 Retained Earnings x

Long Term Investments x

Goodwill x

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