Although the assumption that operating assets and operating liabilities grow proportionally to sales is a very...

Although the assumption that operating assets and operating liabilities grow proportionally to sales is a very good approximation for most companies, there are a few circumstances that might require more complicated modeling techniques. We describe four possible refinements in section 12-8: economics of scale, nonlinear relationships, lumpy purchases of assets, and excess capacity adjustments. However, always keep in mind that additional complexity in a model might not be worth the incremental improvement in accuracy.

a.which items comprise operating current assets Why is it reasonable to assume that they grow proportionally to sales?

b.What are some reasons that net PP&E might grow proportionally to sales, and what are some reasons that it might not?

c.What are spontaneous liabilities?

Solutions

Expert Solution

a.Operating assets include both current assets & fixed assets, that are acquired & aid ,during the conduct of the core operation, for which the business was established.

Here, the items of current assets include---cash, accounts receivables,inventory and all prepaid assets.

It is only highly reasonable to state that all of the above grow proportionately to sales, some of them,if not in a very direct proportion--they increase with sales.

For example, if more sales is made, either cash increases or accounts receivable increase.

Inventory needs to be increased to meet the demand.

Prepaid assets like insurance for inventory received or sent ,increases due to more activity.

b. PP& E will grow ,if the current capacity utilisation of the same is 100% & sales increase need to met with creating additional fixed asset acquisition. In that case, PP&E will grow proportionately with sales.

Whereas,

If the existing PP&E facilities are working below capacity, & there is scope for more units that can be produced (in which case ,sales can be increased), PP&E will not grow proportionately to that increased sales.

c.Spontaneous liabilities are current liabilities that which increase spontaneously,with increase in sales.

For example, accounts payable increase due to increased cost of goods sold, like increased cost of merchandise purchased.

Also accrued liabilities like payment for establihmnet charges like , water, electricity or direct wages to shopfloor workers increase due to increased production , to meet increased the level of sales.

All the above increase naturally, when sales increase.

jeff jeffy answered 2 months ago

Next > < Previous

Related Solutions

Sales will grow by 10% in 2020. All costs, assets, and current liabilities vary directly with sales

Income Statement Year 2019 2020 Net Revenue 140,000 - Cost of Goods Sold 70,000 - Depreciation Expense 9,000 EBIT 61,000 - Interest Expense 10,500 Income Before Taxes 50,500 Tax Expense 10,605 Net Income 2019 Dividend 39,895 9,974 Balance Sheet Year (end of) 2019 2020 2019 2020 Assets Liabilities Current Assets Current Liabilities Cash and Equivalents 10,000 Accounts Payable 21,000 Accounts Receivable 25,000 Long-term Debt 95,000 Inventory 12,000 Total Liabilities 116,000 Fixed Assets, Net 165,000 Stockholders' Equity Total Assets 212,000 Common...

Why are operating assets and liabilities important? How do we calculate net operating assets?

Assume that operating costs, assets, and spontaneous liabilities increase proportionally with sales. Maverick’s 2017 income statement...

Assume that operating costs, assets, and spontaneous liabilities increase proportionally with sales. Maverick’s 2017 income statement and balance sheet are provided below. Determine the percent of sales forecast factors for Maverick’s operating costs, each asset, as well as each spontaneous liability. Format to 2 decimal places. Only complete for applicable cells. If an account does not have a “forecast factor”, then leave it blank. Calculate the net profit margin, payout ratio, ROE, and ROA for 2017. Format as a percent...

Inhale, Inc., is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales.

2018 Income Statement Net sales $ 18,400 Cost of goods sold 15,200 Depreciation 700 Earnings before I and T $ 2,500 Interest paid 70 Taxable Income $ 2,430 Taxes 960 Net income $ 1,470 Dividends $ 390 Inhale, Inc. 2018 Balance Sheet 2018 2018 Cash $ 7,600 Accounts payable $ 6,840 Accounts rec. 2,200 Long-term debt 700 Inventory 8,200 Common stock $ 8,400 Total $ 18,000 Ret. Earnings 11,660 Net fixed assets 9,600 Total assets $ 27,600 Total liabilities &...

AFC Ltd Sales growth 10% Current assets/Sales 15% Current liabilities/Sales 8% Net fixed assets/Sales 77% Costs...

AFC Ltd Sales growth 10% Current assets/Sales 15% Current liabilities/Sales 8% Net fixed assets/Sales 77% Costs of goods sold/Sales 70% Depreciation rate 10% Interest rate on debt 5% Interest paid on cash and marketable securities 4% Tax rate 30% Dividend payout ratio 40% Year 0 1 2 3 4 5 Income statement Sales 1000 1100 1210 1331 1464 1611 Costs of goods sold -700 -770 -847 -932 -1025 -1127 EBITDA 300 330 363 399 439 483 Interest payments on debt...

Gloria is a seasoned sales manager with a very large international company. Although she has a...

Gloria is a seasoned sales manager with a very large international company. Although she has a great deal of experience with sales, she has little experience with investing. Gloria has been investing in her company’s 401K plan. However, she has decided to invest some extra money on her own. Gloria has $75,000 she would like to invest. Since she has recently signed up for internet access to a broker, she is allowed a small number of phone calls to a...

Gloria the Investor Gloria is a seasoned sales manager with a very large international company. Although...

Gloria the Investor Gloria is a seasoned sales manager with a very large international company. Although she has a great deal of experience with sales, she has little experience with investing. Gloria has been investing in her company’s 401K plan. However she has decided to invest some extra money on her own. Gloria has $75,000 she would like to invest. Since she has recently signed up for internet access to a broker, she is allowed a small number of phone...

Changes in Current Operating Assets and Liabilities—Indirect Method Victor Corporation's comparative balance sheet for current assets...

Changes in Current Operating Assets and Liabilities—Indirect Method Victor Corporation's comparative balance sheet for current assets and liabilities was as follows: Dec. 31, Year 2 Dec. 31, Year 1 Accounts receivable $20,000 $16,700 Inventory 70,000 78,700 Accounts payable 7,700 9,400 Dividends payable 27,000 25,000 Adjust net income of $111,900 for changes in operating assets and liabilities to arrive at net cash flow from operating activities. b) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Staley Inc. reported the following data: Net income $284,400 Depreciation expense 67,900 Loss...

Changes in Current Operating Assets and Liabilities—Indirect Method Covington Corporation's comparative balance sheet for current assets...

Changes in Current Operating Assets and Liabilities—Indirect Method Covington Corporation's comparative balance sheet for current assets and liabilities was as follows: Dec. 31, Year 2 Dec. 31, Year 1 Accounts receivable $12,200 $15,500 Inventory 77,400 67,300 Accounts payable 18,000 21,400 Dividends payable 21,000 20,000 Adjust net income of $92,700 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.

Sales are expected to grow by 12% next year. Assuming no change in operations from this year to next year, what are the projected total operating assets?

Projected Operating AssetsBerman & Jaccor Corporation's current sales and partial balance sheet are shown below.This yearSales$1,000Balance Sheet: AssetsCash$100Short-term investments$75Accounts receivable$300Inventories$150 Total current assets$625Net fixed assets$400 Total assets$1,025Sales are expected to grow by 12% next year. Assuming no change in operations from this year to next year, what are the projected total operating assets? Do not round intermediate calculations. Round your answer to the nearest dollar.$

Subjects