EEM, Inc. has the following balance sheet:

It has estimated the following relationships between sales and the various assets and liabilities that vary with the level of sales:
Accounts receivable = $3,310 +0.35 Sales,
Inventory = $2,264 + 0.28 Sales,
Accounts payable = $1,329 + 0.22 Sales.
a. If the firm expects sales of $25,000, what are the forecasted levels of the balance sheet items above?
b. Will the expansion in accounts payable cover the expansion in inventory and accounts receivable?
c. If the firm earns 12 percent on sales after taxes and retains all of these earnings, will it cover its estimated needs for short-term financing?
d. Construct a new balance sheet that incorporates the issuing of additional short-term debt to cover any needs for additional finance. Assume cash remains $1,000.
e. Compare your answers in parts a–d with your answers to parts a–d in

Transcribed Image Text:

EEM, Incorporated Balance Sheet as of 12/31/X0 Assets Cash Accounts receivable Inventory Long-term assets $1,000 7,200 6,100 4,200 $18,500 Liabilities and Equity Accounts payable Bank note payable $ 5,300 3,200 Equity 10,000 $18,500