Jill\'s Wigs Inc. had the following balance sheet last year: Cash $800 Accounts

Question

Jill's Wigs Inc. had the following balance sheet last year:

Cash $800 Accounts payable $350 Accounts receivable $450 Accrued wages $150 Inventory $950 Notes payable $2,000 Net fixed assets $34,000 Mortgage $26,500 Common stock $3,200 Retained earnings $4,000 Total liabilities Total assets $36,200 and equity $36,200

Jill has just invented a nonslip wig for cancer patients which she expects will cause sales to double from $10,000 to $20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. How much outside capital will Jill need if she pays no dividends?

Explanation / Answer

Answer:

This is the original balance sheet:

Assets

Liabilities

Cash

$800

Accounts payable

$350

Accounts Receivable

$450

Accrued Wages

$150

Inventory

$950

Notes payable

$2000

Net Fixed Assets

$34000

Mortgage

$26500

Common stock

$3200

Retained earnings

$4000

Total Assets

36200

Total liability and equity

$36200

As the sales to get doubled his will double up the cash, accounts receivables, inventory. But the fixed assets will not change as she expects not to purchase fixed assets any more.

On the liability side also accounts payables will get doubled, accrued wages gets doubled but notes payable, mortgage and common stock will remain the same. Only $1000 of increased income will be added to the retained earnings as no dividends are paid off.

So now we can prepare the new balance sheet:

Assets

Liabilities

Cash

$800x2= $1600

Accounts payable

$350x2 =$700

Accounts Receivable

$450x2 =$900

Accrued Wages

$150x2 = $300

Inventory

$950x2 =$1900

Notes payable

$2000

Net Fixed Assets

$34000

Mortgage

$26500

Common stock

$3200

Retained earnings

$4000+$1000 = $5000

Total Assets

$38400

Total liability and equity

$37700

So in the new balance sheet total assets are $38400 and liabilities are $37700.

Hence shortfall of $38400-$37700 = $700 can be met by bringing outside capital.

Assets

Liabilities

Cash

$800

Accounts payable

$350

Accounts Receivable

$450

Accrued Wages

$150

Inventory

$950

Notes payable

$2000

Net Fixed Assets

$34000

Mortgage

$26500

Common stock

$3200

Retained earnings

$4000

Total Assets

36200

Total liability and equity

$36200

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