DLEON INC., PART I

e. Suppose DLeons sales manager told the sales staff to start offering 60 day credit terms rather than the 30 day terms now being offered. DLeons competitors react by offering similar terms, so sales remain constant. What effect would this have on the cash account? How would the cash account be affected if sales doubled as a result of the credit policy change?

f. Can you imagine a situation in which the sales price exceeds the cost of producing and selling a unit of output, yet a dramatic increase in sales volume causes the ash balance to decline? Explain.

g. Did DLeon finance its expansion program with internally generated funds) additions to retained earnings plus depreciation) or with external capital? How does the choice of financing affect the companys financial strength?

h. Refer to Tables IC 3.2 and IC 3.4. Suppose DLeon broke even in 2016 in the sense that sales revenues equaled today operation costs plus interest charges. Would the asset expansion have caused the company to experience a cash shortage the required it to Raise external capital? Explain

i. If DLeon starts depreciation fixed assets over 7 years rather than 10 years, would that affect (1) the physical stock of assets, (2) the balance sheet account for fixed assets, (3) the companys reported net income, and (4) the companys cash position? Assume that the same depreciation method is used for stockholder reporting and for tax calculations and that the accounting change has no effect on assets physical lives.