Question

With sales of $500,000, MJM, Inc. is operating at capacity but management anticipates that sales will grow 20 percent during the coming year. The company earns 8 percent on sales and distributes 60 percent of earnings to stockholders. Its current balance sheet is as follows:

MJM, Incorporated Balance Sheet as of 12/31/X0
Assets				Liabilities and Equity
Cash	$	9,000		Accounts payable	$	39,000
Accounts receivable		22,000		Accruals		37,000
Inventory		59,000		Notes payable		0
Current assets		90,000		Current liabilities		76,000
Plant and equipment		110,000		Common stock		70,000
				Retained earnings		54,000
Total assets	$	200,000		Total liabilities and equity	$	200,000

1. In addition to cash, which assets and liabilities will increase with the increase in sales and by how much if the percent of sales is used to forecast the increases? If assets or liabilities does not change enter zero as a forecasted change. Do not round intermediate calculations. Round your answers to the nearest dollar.

   Assets and Liabilities	Change	Forecasted change
   Cash	-Select-Increase or No change	$
   Accounts receivable	-Select-Increase or No change	$
   Inventory	-Select-Increase or No change	$
   Plant and equipment	-Select-Increase or No change	$
   Accounts payable	-Select-Increase or No change	$
   Accruals	-Select-Increase or No change	$
   Notes payable	-Select-Increase or No change	$

2. How much external finance will the firm need? Round your answer to the nearest dollar.

   $ _______

3. If cash did not increase but could be maintained at $9,000, what impact would the lower cash have on the firm's need for external finance? Round your answer to the nearest dollar. Enter your answer as a positive value.

   If cash remained at $9,000 the need for external funds would be -Select- increased or decreased by $_____

4. If the firm distributed 30 percent (2) instead of 60 percent (1) of its earnings, would it need external finance?

   The net increase in retained earnings comparing (2) with (1) is $_____ . It -Select- would or would not cover the external funds needed.

5. Construct a new balance sheet assuming that cash increases with the increase in sales and the firm distributes 60 percent of its earnings to stockholders. If the firm needs external finance, acquire the funds by issuing a short-term note to a commercial bank. Do not round intermediate calculations. Round your answers to the nearest dollar.

   MJM, Incorporated Balance Sheet as of 12/31/X1
   Assets				Liabilities and Equity
   Cash	$			Accounts payable	$
   Accounts receivable	$			Accruals	$
   Inventory	$			Notes payable	$
   Current assets	$			Current liabilities	$
   Plant and equipment	$			Common stock	$
   				Retained earnings	$
   Total assets	$			Total liabilities and equity	$

Answer 1

a) In addition to cash, which assets and liabilities will increase with the increase in sales and by how much if the percent of sales is used to forecast the increases?

Assets and liabilities change forecast change

cash increase 1,800

accounts receivable increase 4,400

inventory reduces 11,800

plant and equipment no change 0

accounts payable no change 0

accruals increases 7,400

notes payables no change 0

cash change was considered as a % change with sales. 9,000 is for 500,000 sales and what is for $ 600,000 sales (500,000+20% change i.e. 100,000). i am assuming sales are not 100% cash sales some portion will be stuck in sundry debtors as well. accordingly the % of change in sales will amount to an increase of $1,800 in cash and its equivalents.

accounts receivable: assuming 100% not cash sales. So % of accounts receivables with original sales compared to the estimated 20% change of sales will amount to $ 4,400 (22,000 is for $500,000 sales what is for increased sales of $ 600,000).

inventory: when a sale is there automatically inventory reduces. same as above the % of inventory to sales was compared to the increased sales % and accordingly that change was reduced from inventory. (59,000 is for 500,000 sales what is the % of it to 600,000 sales and that amounted proportionaly reduced from inventory).

accruals : they will be increased in respect of provision for bad and doubtful debts on a proportionate ratio (37000 is for 500,000 sales what is for 600,000 sales).

b)  How much external finance will the firm need?

Ans:- firm needs external finance to support the above change. Cash change+ accounts receivable change+inventory change-accruals (provision for bad & doubtful debts)= 1,800+4,400+11,800-7,400= $ 10,600.

c) If cash did not increase but could be maintained at $9,000, what impact would the lower cash have on the firm's need for external finance?

Ans: if the firm cash did not increase but maintained at $9,000, then the impact will on retained earnings so the lower cash in firm will increase the need for external finance to that change portion. The new need will be at $ 12,400. ($10,600+1,800).

If cash remained at $9,000 the need for external funds would be increased.

d) If the firm distributed 30 percent (2) instead of 60 percent (1) of its earnings, would it need external finance?

Ans: present dividend distribution plan is 60%. which is $ 54,000 times 60% which is $32,400, the net available retained earnings will be $54,000-$ 32,400=$ 21,600. with an increased sales of 20% the retained earnings would be $62,000 and out of it 60% if distributed to shareholders i.e. $37,200 the available retained earnings not enough to support the change in sales. if the % of distribution is reduced to 30% then the available retained earning would be increased by 30% which can withstand the need of external funds.