You are the new Marketing VP for Watermetco, a company that sells two items: meters You are

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You are the new Marketing VP for Watermetco, a company that sells two items: meters

You are considering buying Example, a manufacturing company. The president and CFO are traveling and will not be back for two weeks, and the financial statements cannot be released until then. However, you have talked to the daughter of the owner and have written down the following comments. Try to construct a balance sheet for the company, making reasonable assumptions where necessary.

- We started Exampleco two years ago with $3.3 million that dad had inherited.

- Our sales have done well, and if we can keep them at last month’s performance, we would reach $4.2 million a year. We hope to do even better than that.

- We bought $4.5 million of equipment at an auction. It was used equipment but had been completely rebuilt, so dad decided on a 10 year depreciation period.

- We just rent the space we are in.

- We never have any cash or notes in the bank. Dad set up a credit line, we float on that. The bank didn’t want to give us long-term financing until we were in operation for two years. We are trying to decide right now whether to take out some long-term financing and really expand the business to sell it to you and stay on as operators. - At first, our draw on our credit line was over 3 million, and the only way we could get it was to have a personal guarantee from my uncle. Lucky for us, the business has gone well, and the draw from the bank has dropped over the two years we have been in business. Dad thinks we can get the requirement for a personal guarantee lifted.

- When we set up the business, we decided to leave the depreciation in the business. We also decided to set up an objective of leaving a quarter-million dollars of net income per year in the company and treating ourselves to a dividend on everything else. So far, we have met our objective.

- We play it safe on inventory. It is running 35 days of the sale, which is a lot considering our material cost is only 50% of the sale. We could probably bring it down, but we have just been too busy filling orders.

- We have been stringing our suppliers out for 50 days. We have to talk to them every month to assure them we are doing okay, but it has worked so far. Because our sales grew to $350k last month and we have stayed with the same supplier, they haven’t minded our slow pay.

- Our prepaid are so small we ignore them. Our accountant said that they weren’t material and that we could just expense this stuff as we spent it.

- We are current on taxes. Dad knew a guy that lost his business because of unpaid taxes, so he has insisted on a monthly payment to keep us current.

- Our payroll is two weeks behind, but it isn’t a big deal because our staff is only 22. Otherwise, we are current on all our expenses.

- Our customers are large companies, and they are sure to slow to pay. Our receivables are running for 55 days.

- We are still getting by on the original equipment we bought.

Do you need the income statement to prepare the balance sheet in this case? Would you be able to make an intelligent decision about whether to buy the business without looking at the income statement? Explain why in one sentence.