Professional Documents
Culture Documents
27,300
35,000
57,000
25,000
16,000
14,000
36,500
65,000
94,500
16,300
During 19x8, the Ruffy Stuffed Toy Company recorded the following transactions:
a. Early in the year, purchased a new toy stuffing machine for $9,000 cash and signed a 3-year note for the balance
of $12,000.
b. Had cash sales of $115,000 and sales on credit of $316,000.
c. Purchased raw materials from suppliers for $207,000.
d. Made payments of $225,000 to its raw materials suppliers.
e. Paid rent expenses totaling $43,000.
f. Paid insurance expenses totaling $23,000.
g. Paid utility bills totaling $7,500; $1,500 of this amount reversed the existing payable from 19x7.
h. Paid wages and salaries totaling $79,000; $3,000 of this amount reversed the payable from 19x7.
i. Paid other miscellaneous operating expenses totaling $4,000.
j. Collected $270,000 from its customers who made purchases on credit.
k. The interest rate on the Loan Payable is 10% per year. Interest was paid on 12/31/19x8.
Other information:
1. The equipment has been estimated to have a useful life of 20 years, with no salvage value. Two years have
been depreciated through 19x7.
2. The existing furniture has been estimated to have a useful life of 8 years (no salvage value), of which one year
has been depreciated through 19x7.
3. The new stuffing machine has been estimated to have a useful life of 7 years, and will probably have no
salvage value.
4. The tax rate is 35%, and assume that taxes are paid on 12/31/19x8.
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5.
6.
7.
Construct the balance sheet for the Ruffy Stuffed Toy Company as of 12/31/19x8.
Construct the income statement for operations during the year 19x8.
Construct a cash flow statement for the year 19x8.
Calculate the following Profitability Ratios:
Return on Sales, Return on Assets, Return on Equity
3.5 Calculate the following Asset Turnover Ratios:
Receivables turnover, Inventory turnover, Asset turnover
3.6 Calculate the following Financial Leverage and Liquidity Ratios:
debt, times interest earned, current ratio, quick (acid) test
3.7 What is the Ruffys book value per share at the end of 19x8?
3.8 Calculate the firms price-to-earnings ratio and the ratio of its market share price to its book value per
share.
SOLUTION:
BALANCE SHEETS
Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Property, Plant, and Equipment
Equipment
Less Accumulated Depreciation
Net Equipment
Furniture
Less Accumulated Depreciation
Net
Furniture
Machine
Less Accumulated Depreciation
Net
Machine
Total Prop, Plant, Equip
Total Assets
19x7
19x8
27,300
35,000
57,000
119,300
10,896.25
81,000
14,000
105,896.25
25,000
(2500)
22,500
16,000
(2000)
14000
25,000
(3,750)
21,250
16,000
(4,000)
12,000
21,000
(3,000)
18,000
36,500
51,250
155,800
157,146.25
65,000
3,000
1,500
0
25,000
94,500
45,000
16,300
61,300
47,000
0
0
12000
25,000
84,000
45,000
28,146.25
73,146.25
155,800
157,146.25
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INCOME STATEMENT
431,000
250,000
181,000
Sales Revenue
COGS
Gross Margin
Expenses
Wages and Salaries Expense
Rent Expense
Insurance Expense
Utility Expense
Miscellaneous Operating Expense
Depreciation Expense
181,000
Income Before Interest and Tax
Interest Expense
Taxable Income
Taxes (0.35)
22,750
2,500
20,250
7,087.50
Net Income
Dividends (0.1)
Income after Dividends
13,162.50
1,316.25
11,846.25
CASH FLOW STATEMENT
Net Income
+Dep
- A/R increase
+ Inventory decrease
- A/P decrease
Total Cash Flow from Operations
- Investment in PPE
Total cash from investing
activities
- Dividends
+ Increase in Notes Payable
Total cash from financing
activities
Change in Cash Flow
35000
57000
69500
81000
14000
47000
13162.5
6,250
(46,000)
43,000
(22,500)
6087.5
21000
21000
1316.25
+12000
+10683.75
16403.75
RATIOS:
ROS
ROA
ROE
Receivables
Turnover
Inventory Turnover
Asset Turnover
Debt
Times Interest Earned
Current
Quick
P/E
Mkt to Book
76,000
43,000
23,000
6,000
4,000
6,250
158,250
22750
22750
13162.5
431000
431000
156473.13
67223.13
58000
0.0528
0.1454
0.1958
7.4310
250000
431000
84000
22750
105896.25
91,896.25
4.625
4.625
35500
156473.13
157146.25
2500
47000
47000
0.6581
3.6573
7.0423
2.7545
0.5345
9.1000
2.2531
1.9552
7.0278
1.2646
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3.9 You have the following information taken from the 1996 financial statements of Computronics
Corporation and Digitek Corporation: (All figures are in $ millions except per share amounts.)
Net income
Dividend payout ratio
EBIT
Interest expense
Average assets
Sales
Average shareholders equity
Market price of the common
stock:
at beginning of year
at end of year
Shares of common stock
outstanding
Computronix
153.7
40%
317.6
54.7
2,457.9
3,379.3
1,113.3
Digitek
239.0
20%
403.1
4.8
3,459.7
4,537.0
2,347.3
$15
$12
200 million
$38
$40
100 million
Compare and contrast the financial performance of the two companies using the financial ratios discussed in
this chapter.
SOLUTION:
To compute total shareholder returns we need to first compute dividends per share and then follow the definition
change in share price plus dividend divided by beginning share price:
For Computronix the dividend per share is (.4 x $153.7 million) /200 million shares = $.3074, and total shareholder
return is: ($12 $15 + .3074) /$15 = 17.95%
For Digitek the dividend per share is (.2 x $239 million) /100 million shares = $.478,and total shareholder return is:
($40 $38 + .478) /$38 = 6.52%
Ratios:
Total
Times
Shareholder
Interest
Firm
Return
ROE
ROA
ROS ATO Earned Debt/Equity
Computronix
Digitek
-17.95%
6.52%
5.806
83.979
1.21
0.47
Digitek offered a higher return to its shareholders than did Computronix: 6.52% vs. 17.95%, despite the
fact that Computronix had a higher ROE, a higher ROA, a higher ROS, and a higher ATO.
Average liabilities for Computronix were $1,344.6 million and for Digitek $1,112.4 million.
Times interest earned was 5.806 for Computronix and 83.979 for Digitek.
Instructors Manual
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20x6
20x7
Sales
$1,200,000
$1,500,000
COGS
750,000
937,500
Gross Margin
450,000
562,500
Advertising Expense
50,000
62,500
Rent Expense
72,000
90,000
48,000
60,000
Utilities Expense
15,000
18,750
EBIT
265,000
331,250
Interest Expense
106,000
113,000
Taxable Income
159,000
218,250
20x8e
Operating Expenses
Taxes (35%)
55,650
76,388
Net Income
103,350
141,863
41,340
56,745
62,010
85,118
BALANCE SHEET
Assets
Cash
$300,000
$375,000
Receivables
200,000
250,000
Inventory
700,000
875,000
1,800,000
2,250,000
$3,000,000
$3,750,000
$300,000
$375,000
500,000
989,882
800,000
900,000
1,100,000
1,100,000
Shareholders Equity
Common Stock
Retained Earnings
Total Liabilities and Equity
a.
b.
c.
d.
e.
300,000
385,118
$3,000,000
$3,750,000
Determine which items varied in constant proportion to sales between 20x6 and 20x7.
Determine the rate of growth in sales that was achieved from 20x6 to 20x7.
What was the firms return on equity for 20x7? Can you calculate it for 20x6?
What was the firms external (additional) funding requirement determined to be for 20x7? How was the
funding obtained?
Prepare pro forma statements for 20x8 with the following assumptions:
The firm intends to pay down $100,000 of its short-term debt on Jan. 1, 20x8.
Interest rates on debt are as stated in the balance sheet, and are applied to the
the start-of-year (20x8) balances for short-term and long-term debt. Remember that the firm
intends to pay down part of the short-term loan on 1/1/20x8.
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1.
2.
f.
How much additional funding will the firm need for 20x8?
The firm will close 40% of any additional funding gap by issuing new stock. It will then use up to
$100,000 of long-term debt, with the remainder coming from 9% short-term borrowing. Complete
the pro forma balance sheet for 20x8.
3. What would be the firms forecasted return on equity for 20x8?
Suppose the firm anticipates an increase in the corporate tax rate to 38%. Determine the amount of
additional funding that would be required if this change comes to pass.
SOLUTION:
a.
INCOME STATEMENT
Sales
20x6
20x7
20x6
20x7
$1,200,000
$1,500,000
100.0%
100.0%
COGS
750,000
937,500
62.5%
62.5%
Gross Margin
450,000
562,500
37.5%
37.5%
Advertising Expense
50,000
62,500
4.2%
4.2%
Rent Expense
72,000
90,000
6.0%
6.0%
48,000
60,000
4.0%
4.0%
Utilities Expense
15,000
18,750
1.3%
1.3%
EBIT
265,000
331,250
22.1%
22.1%
Interest Expense
106,000
113,000
8.8%
7.5%
Taxable Income
159,000
218,250
13.3%
14.6%
Taxes (35%)
55,650
76,388
4.6%
5.1%
Net Income
103,350
141,863
8.6%
9.5%
41,340
56,745
3.4%
3.8%
62,010
85,118
5.2%
5.7%
Operating Expenses
BALANCE SHEET
20x6
20x7
20x6
20x7
$300,000
$375,000
25.0%
25.0%
200,000
250,000
16.7%
16.7%
Assets
Cash
Receivables
Inventory
700,000
875,000
58.3%
58.3%
1,800,000
2,250,000
150.0%
150.0%
$3,000,000
$3,750,000
250.0%
250.0%
$300,000
$375,000
25.0%
25.0%
500,000
989,882
41.7%
66.0%
800,000
900,000
66.7%
60.0%
1,100,000
1,100,000
91.7%
73.3%
300,000
385,118
25.0%
25.7%
$3,000,000
$3,750,000
250.0%
250.0%
Shareholders Equity
Common Stock
Retained Earnings
Total Liabilities and Equity
Instructors Manual
b.
c.
d.
e.
Chapter 3
Page 38
Sales
COGS
Gross Margin
Operating Expenses
Advertising Expense
Rent Expense
Salesperson Commission Expense
Utilities Expense
EBIT
Interest Expense
Taxable Income
Taxes (35%)
Net Income
Dividends (30% payout)
Change in Retained Earnings
BALANCE SHEET
Assets
Cash
Receivables
Inventory
Property, Plant, Equipment
Total Assets
Liabilities and Shareholders Equity
Liabilities
Payables
Short-term debt (10% interest)
Long-term debt (7% interest)
Shareholders Equity
Common Stock
Retained Earnings
Total Liabilities and Equity
1
20x8e
$1,725,000
1,078,125
646,875
$
72,450
103,500
69,000
22,425
379,500
151,9881
227,512
79,629
147,883
44,365
103,518
$ 431,250
288,075
1,005,675
2,587,500
$4,312,500
431,250
889,882
489,290
$4,312,500
1) Additional Funding = Change in Assets - Increase in RE Increase in Payables + Decrease in Short term debt
(10% interest) on 1/1/19x8
$502,078 =
562,500
104,172
56,250 +
100,000
Note that this equation takes into account the financing needed to pay down the $100,000 of the short-term debt on
Jan 1, 20x8.
Instructors Manual
2) 20x8 balance for:
Short-term debt (10%):
Short-term debt (9%):
Long-term debt:
Common Stock:
Chapter 3
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$889,882
$201,247 = ((502,078 x .6) 100,000)
$1,000,000 = $900,000 + $100,000
$1,300,831 = (40% x 502,078 + 1,100,000)
20x8e
431,250
889,882
201,247
1,000,000
1,300,831
489,290
$4,312,500
Note that when using the pro forma statements to determine the required amount of additional (external) funding
needed, one important assumption is made: that the debt used to satisfy the funding is acquired in total at the end of
the year 20x8, though this may not be the case in real life. This assumption removes the circular reference problem
between debt and the associated interest expense, because it essentially holds the interest constant. Pb 3.14 below
deals with that issue.
3) Forecasted ROE for 20x8e = (148,883/((1,485,118 + 1,790,121)/2)) = 9.0%
f.
3.11 Take the pro forma statements (with tax rate = .35) developed in problem 3.10, and:
a. Revise them assuming a growth rate in sales from 19x7 to 19x8 of 10%. What is the additional funding
required for 19x8 under this scenario?
b. Now, develop pro forma statements for 19x9 assuming a growth rate in sales of 20% from 19x8 to 19x9.
What is the additional funding needed for 19x9? The firm plans to use 9 % short-term debt to cover this
entire amount.
SOLUTION:
a. Additional Funding = Change in Assets - Increase in R/E - Increase in Payables + Decrease in Short term
Debt (at 10% interest)
$341,489 =
375,000
96,011
37,500 + 100,000
Note that this equation takes into account the financing needed to pay down the $100,000
of the short-term debt on Jan. 1, 19x8.
Instructors Manual
Chapter 3
INCOME STATEMENT
Sales (assuming 10% growth over 19x7)
COGS
Gross Margin
Operating Expenses
Advertising Expense
Rent Expense
Salesperson Commission Expense
Utilities Expense
EBIT
Interest Expense
Taxable Income
Taxes (35%)
Net Income
Dividends (30% payout)
Change in Retained Earnings
Page 40
19x8e
1,650,000
1,031,250
618,750
69,300
99,000
66,000
21,450
363,000
151,9881
211,012
73,854
137,158
41,147
96,011
BALANCE SHEET
Assets
Cash
Receivables
Inventory
Property, Plant, Equipment
Total Assets
Liabilities and Shareholders Equity
Liabilities
Payables
Short-term debt (10% interest)
Short-term debt (9% interest)
Long-term debt (7% interest)
Shareholders Equity
Common Stock
Retained Earnings
Total Liabilities and Equity
1
$412,500
275,550
961,950
2,475,000
$4,125,000
$412,500
889,882
104,893
1,000,000
1,236,5962
481,129
$4,125,000
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Chapter 3
b.
INCOME STATEMENT
Sales
COGS
Gross Margin
Operating Expenses
Advertising Expense
Rent Expense
Salesperson Commission Expense
Utilities Expense
EBIT
Interest Expense
Taxable Income
Taxes (35%)
Net Income
Dividends (30% payout)
Change in Retained Earnings
19x9e
$1,980,000
1,237,500
742,500
83,160
118,800
79,200
25,740
435,600
168,4291
267,171
93,510
173,661
52,098
121,563
BALANCE SHEET
Assets
Cash
Receivables
Inventory
Property, Plant, Equipment
Total Assets
Liabilities and Shareholders Equity
Liabilities
Payables
Short-term debt (10% interest)
Short-term debt (9% interest)
Long-term debt (7% interest)
Shareholders Equity
Common Stock
Retained Earnings
Total Liabilities and Equity
1
$495,000
330,660
1,154,340
2,970,000
$4,950,000
$495,000
889,882
725,8302
1,000,000
1,236,596
602,692
$4,950,000
Page 41
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3.12 Suppose that after analyzing the results of 19x8 and preparing pro forma statements for 19x9, the Give
Me Debt Company anticipates an increase in total assets of $50, an increase in retained earnings of $25, and
an increase in payables of $40. Assume that other than the payables, the firms liabilities include short-term
and long-term debt, and that its equity includes common stock and retained earnings.
a. The Chief Financial Officer of the company asks you to determine the required
amount of external funding in19x9. What do you tell the CFO?
b. What actions can Give Me Debt Co. undertake to address the situation you have found?
SOLUTION:
a. You tell the CFO that the company is over-funded by $15. That is, the difference between the increase in
assets ($50) and the increase in retained earnings plus the increase in payables is $15. (50 25 40 = 15)
b. The company can take some of the retained earnings and pay them out as dividends, or it could use it to
reduce any of the debt classes (payables, short-term debt, long-term debt).
3.13 Place the following planning events in their likely order of occurrence within the planning cycle:
___ Funding needs for implementation of tactical plans are estimated
___ The final firm-wide plan and budgets are completed
___ CEO and top management team establish strategic objectives for the firm
(ex: increase market share from 10% to 12%)
___ Line managers devise action plans to support strategic objectives
___ Revisions are made to the strategic plan and divisional budgets based on
feedback from divisional managers with regards to resource (money,
people) requirements
___ Decisions are made as to which sources of external financing to tap
___ Integration of divisional budgets into a preliminary firm-wide budget
by CEO and top management team
___ The firm determines the amount of required external financing
___ Tactical plans and budgets are reviewed with division management;
priorities are assigned to planned activities
___ Division managers review the strategic objectives with their line (or tactical)
management.
SOLUTION:
Place the following planning events in their likely order of occurrence within the planning cycle:
_4_ Funding needs for implementation of tactical plans are estimated
_8_ The final firm-wide plan and budgets are completed
_1_ CEO and top management team establish strategic objectives for the firm (ex: increase market share
from 10% to 12%)
_3_ Line managers devise action plans to support strategic objectives
_7_ Revisions are made to the strategic plan and divisional budgets based on feedback from divisional
managers with regards to resource (money, people) requirements
10_ Decisions are made as to which sources of external financing to tap
_6_ Integration of divisional budgets into a preliminary firm-wide budget by CEO and top management
team
_9_ The firm determines the amount of required external financing
_5_ Tactical plans and budgets are reviewed with division management; priorities are assigned to
planned activities
_2_ Division managers review the strategic objectives with their line (or tactical) management.
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3.14 Suppose that the sharply abbreviated actual 19x8 and pro forma 19x9 income statement and balance
sheet for Cones R Us, an ice-cream retailer, appear as follows:
INCOME STATEMENT
EBIT
Interest Expense
Taxable Income
Net Income (after taxes of .33)
Dividends
Change in Retained Earnings
BALANCE SHEET
Assets
Liabilities
Payables
Debt
Shareholders Equity
19x8
19x9e
$100
25
75
50
20
30
$800
$1000
80
300
420
100
450
450
The $25 interest expense projected for 19x9 is based on a rate of 8.33% applied to the outstanding debt
balance of $300 at the end of 19x8. Debt increases from $300 to $450 because of external financing that is
obtained to close the gap exhibited in the relationship:
Additional
Financing = Change in Assets - increase in retained earnings - increase in payables
Needed
a.
What problems are created in using the pro forma statements to determine the required amount of
additional (external) financing if the debt that will be used to satisfy the funding need is acquired in
total at the beginning of 19x9, rather than at the end of 19x9 as is implied in these statements?
b. Is this problem likely to be significant? Why?
SOLUTION:
a. The problem is the circular relationship between a means used to meet funding needs (debt) and a factor used
to determine the amount of that need (interest). Interest expense is a factor in determining net income and,
ultimately, the size of the change to retained earnings. The change in retained earnings is further used to
determine the amount of required additional financing. Some portion of the additional funding will be met by
increased debt, which creates additional interest expense. If this debt is assumed to be acquired at the start of
19x9, then the additional interest expense will be incurred in 19x9, which will change the addition to retained
earnings for that year, which will change the determination of the amount of additional funding required, hence
again changing the debt and the associated interest expense. Assuming the debt at the end of a year removes
the circular reference problem, because it essentially holds interest constant.
b.
The problem is not likely to be significant. As an illustration, with debt at 10% and taxes at 40%:
$200 Debt acquired
$200 Debt not acquired
at start of year
until end of year
($1200 balance)
($1000 balance)
EBIT
500
500
Interest
120
100
Taxable Income
380
400
Net Income
228
240
Dividends (10%)
22.80
24.00
Change in R/E
205.20
216.00
In this one iteration scenario, a $200 difference in debt produces a $20 difference in interest, with an eventual
$10.80 reduction in the change in retained earnings. On the second iteration, this lower retained earnings would
result in a larger additional funding need (by $10.80). If this is met exclusively by debt (acquired at the start of a
Instructors Manual
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Page 44
period), total debt would be $1210.80, with associated interest of $121.08, or $1.08 larger than the first iteration.
The effect becomes negligible. In the context of preparation of pro forma statements, which use estimates (hence
containing varying amounts of error), the difference in approach is even less material.
3.15 Assume a firm has net income in 19x9 of $20 and its end-of-year 19x8 total assets were $450. Further
assume that the firm has a standing requirement to maintain a debt/equity ratio of 0.8, and that its managers
are prohibited from further borrowing or stock issuance.
a. What is this firms maximum sustainable growth rate?
b. If the firm pays $6 of the $20 net income as a dividend, and plans to maintain this payout ratio into the
future, now what is its maximum sustainable growth rate?
c. If the firm uses $12 of the $20 net income to repurchase some of its outstanding shares, and plans to
maintain the use of this ratio of net income for future repurchases, now what is its maximum sustainable
growth rate?
d. If the firm takes action as described in parts b) and c), what would its maximum sustainable growth rate
be?
SOLUTION:
a. Debt/Equity = .8; Assets = $450; Debt = $200; Equity = $250; growth rate = 20/250 =8%
b. growth rate = 8% x (1-6/20) = 5.6%
c. growth rate = 8% x (1-12/20) = 3.2%
d. growth rate = 8% x (1- 6/20 12/20) =0 .8%
3.16 Working capital management questions:
a. Suppose you own a firm that manufactures pool tables. Thirty days ago, you hired a consultant to
examine your business and suggest improvements. The consultants proposal, if implemented, would
allow your firm to shorten the time between each sale and the subsequent cash collection by 20 days,
slightly lengthen the time between inventory purchase and sale by only 5 days, but shorten the time
between inventory purchase and your firms payment of the bill by 15 days. Would you implement the
consultants proposal? Why?
b. In general, the principles of cash cycle time management call for a firm to shorten (minimize) the time it
takes to collect receivables, and lengthen (maximize) the time it takes to pay amounts it owes to suppliers.
Explain what trade-offs need to be managed if the firm offers discounts to customers who pay early, and
the firm also foregoes discounts offered by its suppliers by extending the time until it pays invoices.
c. Suppose it is 3/13/x2, and you just received your monthly credit card statement with a new balance of
$2000. The payment is due on 4/5/x2, but your spouse panics at the sight (and size) of the balance and
wants to pay it immediately. If you practice the principles of cash cycle time management in your
personal finances, when would you make the payment? Why? What danger exists in adopting this
strategy?
d. Some furniture companies conduct highly-advertised annual sale events in which customers can either
take an upfront discount for a cash (or credit card) purchase, or defer finance charges for up to one year
on their purchases by charging it to the companys credit account. Assume that the two options do not
present a time value of money advantage for the company. In terms of cash cycle management: (1) Why
does the company offer the discount? (2) Why might the company be willing to forego cash collection for
one year if a customer chooses to defer? What risk does the company assume in the deferment case that it
does not assume in the discount case?
e. Compare the frequency with which you think a firm may monitor its working capital situation, and
move to correct a problem, with the frequency of the firms planning exercise in forecasting future sales
and determining the need for additional financing.
f. If a firm were to monitor its working capital situation closely, what problem might it be looking to
avoid?
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SOLUTION:
a. Cash cycle time = Inventory period + receivables period - payables period
+5
-20
-15
The consultants proposal results in no net change to cash cycle time, so theres no reason to implement it.
b. By offering discounts to customers for early payment, the firm is shortening its receivables period, but also
giving away some money in the form of the discount. By waiting to pay its suppliers, the firm is extending its
payables period, but the net effect is to spend more money than is necessary to resolve open invoices. A
question to be asked: Is the firm earning more by holding its money over the period between when the discount
is forgone and the total invoice from a supplier comes due, than it is incurring in the form of the implicit
interest charge by paying later? Or, is there some circumstance which at the present time calls for the retention
of cash for as long as possible?
c. You would make the payment as close to the 4/5/x2 due date as you can without being late and incurring the
finance charges. Youd be lengthening your personal payables period by waiting for the due date rather than
paying immediately.
d. The company offers the discount to collect its cash as soon as possible, or to shorten its receivables period. The
company is willing to defer cash collection for one year because it will be moving inventory out of its stores, or
shortening its inventory period. This is a larger consideration if the inventory represents a model year that is
coming to a close and new inventory is soon to be delivered. The risk that a company assumes in the deferment
case is the risk of default. Since the customer will not pay for one year and has charged the purchase to a
company credit account, the company is exposed to the possibility that the customer will not pay when one year
passes. It does not have this exposure when the customer pays cash or uses another (external) credit account.
e.
f.
Working capital management is an operational activity that may be performed daily, weekly, or monthly. Firms
in trouble that are concerned about meeting their short-term obligations will monitor it more on a daily or
weekly basis, while stable firms may monitor it less frequently, perhaps monthly. The planning exercise and the
determination of required additional funding is normally done in earnest once a year, but the plan is revisited
throughout the year, perhaps quarterly, to compare actual results against estimated results and to decide upon
adjustments to the plan.
Illiquidity.
3.17 How would the following assets and liabilities be recorded on the balance sheets of their owners?
a. a lottery ticket
b. a successful song
c. an unsuccessful movie
SOLUTION:
a. It will not be recorded. The existence of a future economic benefit is very uncertain.
b. Though an economically significant asset, it will not be recorded on the accounting balance sheet.
c. Not recorded on balance sheet.
Instructors Manual
Chapter 3
Page 46
Instructors Manual
Chapter 3
Page 47