Question

Van Auken Lumber’s 2013 financial statements are shown below.
Van Auken Lumber: Balance Sheet as of December 31, 2013 (Thousands of Dollars) Cash $1,800 Accounts payable $7,200 Receivables 10,800 Notes payable 3,472 Inventories 12,600 Accrued liabilities 2,520 Total current assets $25,200 Total current liabilities $13,192 Mortgage bonds 5,000 Net fixed assets 21,600 Common stock 2,000 Retained earnings 26,608 Total assets $46,800 Total liabilities and equity $46,800

Van Auken Lumber: Income Statement for Dec 31, 2013 (Thousands of Dollars)

Sales	$36,000
	Operating costs including depreciation	30,783
	Earnings before interest and taxes	$5,217
	Interest	1,017
	Earnings before taxes	$4,200
	Taxes (40%)	1,680
	Net income	$2,520
	Dividends (60%)	$1,512
	Addition to retained earnings	$1,008

a. Assume that the company was operating at full capacity in 2013 with regard to all items except fixed assets, which in 2013 were being utilized to only 75% of capacity. By what percentage could 2014 sales increase over 2013 sales without the need for an increase in fixed assets?

b. Now suppose that 2014 sales increase by 25% over 2013 sales. Use the forecasted financial statement method to forecast a 12/31/14 balance sheet and 2014 income statement, assuming that (1) the historical ratios of operating costs/sales, cash/sales, receivables/sales, inventories/ sales, accounts payable/sales, and accruals/sales remain constant; (2) Van Auken cannot sell any of its fixed assets; (3) any required financing is done at the end of 2014 as through a line of credit; (4) the firm earns no interest on its cash; and (5) the interest rate on all of its debt is 12%. Van Auken pays out 60% of its net income as dividends and has a tax rate of 40%. What is Van Auken’s financing deficit or surplus? (Hints:Assume any additional financing through the line of credit will be drawn on the last day of the year. Therefore, the line of credit will not accrue interest expense during the year because any new line of credit is added at the end of the year; also, use the forecasted income statement to determine the addition to retained earnings for use in the balance sheet.)

Answer 1

Solution:

a) Calculation of the Percentage of 2014 Sales Increase Over 2013 Sales Without the Need for an Increase in Fixed Assets:

Therefore, the Percentage of 2014 Sales Increased is 33.33%.

b) Now suppose that 2014 sales increase by 25% over 2013 sales. Using the forecasted financial statement method to forecast a 12/31/14 balance sheet and 2014 income statement:

Percentage of Sales Calculation
Sales	$36,000	$30,738/$36,000	85.51%
Operating Costs	($30,783)
Earnings Before Interest and Taxes	$5,217
Less: Interest	($717)
Pre-tax earnings	$4,500	$1,800/$4,500	40.00%
Less: Tax (40%)	($1,800)
Net Income	$2,700	$1,620/$2,700	60.00%
Less: Dvidends (60%)	($1,620)
Addition to Retained Earnings	$1,080

Assets	Amount	Liabilities	Amount
Cash	$1,800	Accounts Payable	$7,200
Receivables	$10,800	Notes Payable	$3,472
Inventories	$12,600	Line of Credit	$0
		Accruals	$2,520
Total Current Assets	$25,200	Total Current Liabilities	$13,192
		Mortgage Bonds	$5,000
		Common Stock	$2,000
		Retained Earnings	$26,608
Total Assets	$46,800	Total Liabilities and Equity	$46,800

Percentage of Calculations:

Cash / Sales	$1,800/$36,000	5.00%
Inventory/Sales	$12,600/$36,000	35.00%
Accounts Receivables/Sales	$10,800/$36,000	30.00%
Accounts Payable/Sales	$7,200/$36,000	20.00%
Accruals/Sales	$2,520/$36,000	7.00%

Assets	Amount		Liabilities	Amount
Cash	$1,800	5%	Accounts Payable	$7,200	20%
Receivables	$10,800	30%	Notes Payable	$3,472
Inventories	$12,600	35%	Line of Credit	$0
			Accruals	$2,520	7%
Total Current Assets	$25,200		Total Current Liabilities	$13,192
			Mortgage Bonds	$5,000
			Common Stock	$2,000
			Retained Earnings	$26,608
Total Assets	$46,800		Total Liabilities and Equity	$46,800