Suppose that ABC organization\'s current Sales = 20,000. Also, suppose ABC has f
ID: 2757266 • Letter: S
Question
Suppose that ABC organization's current Sales = 20,000. Also, suppose ABC has forecast the following values:
Costs of goods sold (% of sales)
0.85
General, selling, and administrative expenses (% of Sales)
0.10
Cash and securities (days sales cash)
15
Accounts receivable (collection period)
50
Inventories (inventory turnover)
10
Accounts payable (payables period)
60
Where days sales cash = cash / (sales/day), the collection period = AR / (sales/day), and the payables period = AP / (cost of sales/day).
Complete the template below before solving for the additional funds, or the external funding, needed to finance a 30% increase in sales.
Income Statement
Sales
Cost of goods sold
Gross profit
Expenses:
General, selling, and administrative expenses
Net interest expense
100
Earnings before taxes
Tax
Earnings after tax
Balance Sheet
Assets
Current assets:
Cash and securities
Accounts receivable
Inventories
Prepaid expenses
20
Total current assets
Net fixed assets
300
Total assets
Liabilities and owners' equity
Current liabilities
Bank loan
0
Accounts payable
Current portion of long-term debt
100
Accrued wages
30
Total current liabilities
Long-term debt
700
Common stock
150
Retained earnings
1500
Total liabilities and owners' equity
External funding required
???
Costs of goods sold (% of sales)
0.85
General, selling, and administrative expenses (% of Sales)
0.10
Cash and securities (days sales cash)
15
Accounts receivable (collection period)
50
Inventories (inventory turnover)
10
Accounts payable (payables period)
60
Explanation / Answer
Particulars
days sales cash = cash / (sales/day)
15 = cash/(20000/365)
cash = 821.92
collection period = AR / (sales/day)
50 = AR/(20000/365)
AR = 2739.73
payables period = AP / (cost of sales/day)
60 = AP/(1700/365)
AP = 279.45
Inventories (inventory turnover) = Sales / Inventory
10 = 20000/Inventory
Inventories = 2000
Income Statement
Amount
Sales
20,000
Cost of goods sold
17000
Gross profit
3,000
Expenses:
General, selling, and administrative expenses
2000
Net interest expense
100
Earnings before taxes
900
Tax
0
Earnings after tax
900
Balance Sheet
Amount
Assets
Current assets:
Cash and securities
821.92
Accounts receivable
2739.73
Inventories
2000
Prepaid expenses
20
Total current assets
Net fixed assets
300
Total assets
5881.65
Liabilities and owners' equity
Current liabilities
Bank loan
0
Accounts payable
279.45
Current portion of long-term debt
100
Accrued wages
30
Total current liabilities
409.45
Long-term debt
700
Common stock
150
Retained earnings(1500+900)
2400
Total liabilities and owners' equity
3250
External funding required
2222.2
NOTE: Assume Earning of current year is not included in retained earnings.
Particulars
days sales cash = cash / (sales/day)
15 = cash/(20000/365)
cash = 821.92
collection period = AR / (sales/day)
50 = AR/(20000/365)
AR = 2739.73
payables period = AP / (cost of sales/day)
60 = AP/(1700/365)
AP = 279.45
Inventories (inventory turnover) = Sales / Inventory
10 = 20000/Inventory
Inventories = 2000
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