Clyde's Well Servicing has the following financial statements. The balance sheet items, profit margin, and dividend payout have maintained the same relationships the past couple of years; these relationships are anticipated to hold in the future. Clyde's has excess capacity, so there is no expected increase in capital assets.

Income Statement
Sales ...................................... . ..................$2,000,000
Cost of goods sold ...... ..... . .. .. .. . ....... . .....1,260,000
Gross profit. ........................ . ....... . .................740,000
Sell ing and administrative expense. ................400,000
Amortization ............................ . . .......................55,000
Earnings before interest and taxes ...... . . .........285,000
Interest .. .............................................................50,000
Earnings before taxes .......................................235,000
Taxes ...................................... . ..........................61,000
Earnings ava ilable to common shareholders. $ 174,000
Dividends paid ............................................. . $ 104,400

a. Using a percent-of-sales method, determine whether Clyde's can handle a 30 percent sales increase without using external financing. If so, what is the need?
b. If the average collection period of receivables could be held to 43 days, what would the need be for external financing? All other relationships remain the same.

c. Suppose the following results with the increased sales of $600,000.
Cash increases by ...................................................... .........$5,000
Average collection period .... .. ... . ......... .. .. ... . . ...............43 days
Inventory turnover (COGS) ... .. .. .. ......... .. .. .. .. . .............6X
Capital assets increase by .. ................................................$125,000
Accounts payable increase...................................................in proportion to sales
Accruals ........................ .. ...................................................no change
Long-term debt decreases by ..... . ......... .. .. ... . . . ............$25,000
Gross profit margin . ............................................................40%
Sell ing, general, and administrative expense increase by ..$50,000
Amortization increases by. ...................................................$12,500
Interest decreases by ........ .. .. .. ......... .. .. .. .. . . ...............$10,000
Tax rate .................. .. .. ... . ......... .. .. ... . . . ........................35%
Dividends increase to ............................................................$120,000

What new funds would be required? The first $75,000 of any new funds would be short-term debt and then long-term debt. Prepare the pro forma balance sheet.
 

Transcribed Image Text:

Balance Sheet Assets Liabilities and Shareholders' Equity Cash .... Accounts receivable.. $ 30,000 Accounts payable.. $ 105,000 260,000 Accruals.... 210,000 Bank loan. 20,000 Inventory.... Current assets... . Capital assets. 150,000 500,000 Current liabilities... 275,000 550,000 Long-term debt . Common stock ... 200,000 175,000 Retained earnings.... 400,000 $1,050,000 Total assets.... $1,050,000 Total liabilities and equity... Balance Sheet Assets Liabilities and Shareholders' Equity Cash .... Accounts receivable.. $ 30,000 Accounts payable.. $ 105,000 260,000 Accruals.... 210,000 Bank loan. 20,000 Inventory.... Current assets... . Capital assets. 150,000 500,000 Current liabilities... 275,000 550,000 Long-term debt . Common stock ... 200,000 175,000 Retained earnings.... 400,000 $1,050,000 Total assets.... $1,050,000 Total liabilities and equity...

Answer rating: 100% (QA)

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