Question

Tarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics. Tarheel expects to earn $0.9 millions after taxes on the venture during the first year. The president of Tarheel wants to know what the subsidiary’s balance sheet would look like. The president believes that it would be advisable to begin the new venture with ratios that are similar to the industry average. Tarheel plans to make all sales on credit. All calculations assume a 365-day year. Industry Averages Current ratio 2:1 Quick ratio 1.2:1 Net profit margin ratio 5% Average collection period 30 days Debt ratio 44% Total asset turnover ratio 2 times Current liabilities/stockholders’ equity 25% Based upon the industry average financial ratios presented above, complete the projected balance sheet for Tarheel’s upholstery subsidiary. In your computations, you should round all numbers to the nearest $1,000. Forecasted Upholstery Subsidiary Balance Sheet Cash $   Total current liabilities $   Accounts receivable Long-term debt Inventory    Total debt $      Total current assets $   Stockholders’ equity Net fixed assets    Total liabilities and stockholders’ equity $      Total assets $

Answer 1

Given the net income =900,000

The Net profit margin is given as .05 or 5%

So Net Profit /Net sales =.05

That's 900,000/x=.05

So net sales =$18,000,000

The Total Asset Turnover ratio = Sales /total Assets is given as 2

Sales =18,000,000 so Total assets =$18,000,000/2=$9,000,000

The Debt Ratio which is Total liabilities /total assets is given as 44% or .44

the total assets =$9,000,000 so the Total liabilities(Total debt) .44*9,000,000=$3,960,000

Since Assets =Liabilities +Equity

Liabilities =$3,960,000 Assets =$9,000,000

Equity=$9,000,000-$3,960,000

=$5,040,000(Stockholder Equity)

The Current Liability to Stock Holder Equity is given as 25% or .25

The Stockholder Equity=$5,040,000

So the Total Current Liability =$5,040,000*.25 =$1,260,000

The Total Liability =$3,960,000

So the Long term debt =$3,960,000-$1,260,000=$2,700,000

The Current ratio is given as 2:1 that's 2.0

Current Ratio =Current assets /Current liability Current liability=$1,260,000

So Current Assets =$1,260,000*2=$2,520,000

Total Assets =$9,000,000 So the Fixed Assets =Total Assets -Current Assets =$9,000,000-$2,520,000=$6,480,000

Quick ratio=Quick assets /Current liability =1.2

Quick Assets =Current Assets -(Stock +Prepaid Expenses)

So Current Assets -Quick Assets gives Inventory(Stock)

Current liability=$1,260,000 SO quick assets =$1,512,000

So Inventory =$2,520,000-$1,512,000=$1,008,000

Average Collection Period =Average Receivables/Credit Sales *365

30*18,000,000=365*Accounts Receivable

We get Accounts Receivable as $540,000,000/365=$1,479,452

Current Assets include Cash accounts receivable and Inventory

Total current assets =$2,520,000

We have inventory as $1,008,000 Accounts Receivable as $1,479,452

So Cash =$2,520,000-$1,479,452-$1,008,000=$32,548