Question

Problem 23-04 BBP, Inc., with sales of $700,000, has the following balance sheet: BBP, Incorporated Balance Sheet as of 12/31/X0 Assets Liabilities and Equity Cash $ 42,000 Accounts payable $ 21,000 Accounts receivable 70,000 Accruals 35,000 Inventory 98,000 Notes payable 45,000 Current assets 210,000 Current liabilities 101,000 Fixed assets 195,000 Common stock 100,000 Retained earnings 204,000 Total assets $ 405,000 Total liabilities and equity $ 405,000 The firm earns 16 percent on sales and distributes 25 percent of its earnings. Using the percent of sales, determine whether the firm will need external funds and forecast the new balance sheet for sales of $910,000 assuming that cash changes with sales and that the firm is not operating at capacity. Use newly issued short-term debt to cover any needs for additional finance. If the firm has excess funds, add them to cash. Round your answers to the nearest dollar. Enter your answers as positive values. The firm -Select one -will need external // will have excess  funds of $ _____ BBP, 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    Fixed assets    Common stock    Retained earnings    Total assets $    Total liabilities and equity $    Would your answers be different if the firm distributed all of its earnings? Round your answers to the nearest dollar. Enter your answer as a positive value. If management distributed all the firm's earnings, it Select one: will need external // will have excess funds of $_____ .

Answer 1

Requirement 1
Sales growth rate (g)= (910,000-700,000)/700,000 = 30%
Increase in Current Assets = 210,000*30% = $63,000
Increase in Current Liabilities = 101,000*30% = $30,300
Profit margin = 910,000 x 16% = $145,600
Retention ratio = 1-0.25 = 0.75 or 75%
Addition to Retained earnings = $145,600 X75%
Addition to Retained earnings = $109,200
External finance need = Increase in current assets - Increase in current liabilities-Increase in retained earnings
External finance need = $63,000-30,300-109,200 = $ -76,500
Firm will have excess funds of $ 76,500
BBP, Incorporated Balance Sheet as of 12/31/X1
Assets		Liabilities and Equity
Cash	1,31,100	Accounts payable	27,300
Accounts receivable	91,000	Accruals	45,500
Inventory	1,27,400	Notes payable	58,500
Current assets	3,49,500	Current liabilities	1,31,300
Fixed assets	1,95,000	Common stock	1,00,000
		Retained earnings	3,13,200
Total assets	5,44,500	Total liabilities and equity	5,44,500
Requirement 2
If the firm distributed all of its earnings, it will external funds of $32,700
Explanation:
External finance need = Increase in current assets - Increase in current liabilities
External finance need = $63,000-30,300 = $ 32,700