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Q1) BPC anticipates reaching sales level of $6 million in one year. Company expects net income in the next year to equal $400,000. Over past several years, company has been paying 50k in dividends to its stockholders. Company expects to continue this policy for at least next year. Actual balance sheet and income statement for BPC are given below:

BPC Balance sheet as of December 31, 2005
Cash 200,000 Accounts Payable 600,000
Accounts receivable 400,000 Notes Payable 500,000
Inventories 1,200,000    
Current liabilities 1,100,000    
 
Current assets 1,800,000 Long-term debt 200,000
Net fixed assets 500,000 Stockholder's equity 1,000,000
Total assets 2,300,000 Total Liabilities and equity 2,300,000

a) Using percentage of sales method, compute additional financing needed over next year at the $6 million sales level. Illustrate pro forma balance sheet for company as of Dec 31, 2006; suppose a sales level of $6 million is reached. Suppose that all assets differ proportionately with sales. Accts payable is the only liability which varies proportionately with sales. suppose additional financing required is obtained in the form of notes payable.

b) Assume BPC mgmt feels average collection period on extra sales (sales over 4 million) will be 60 days, instead of the present level. By what amount will this increase in average collection period increase financing needed by company over the next year?

c) If BPC's banker needs company to maintain current ratio equal to 1.6 or greater, determine the max amount of additional financing which can be in the form of bank borrowings (notes payable)? Determine other potential sources of financing are available to the company?

Accounting Basics, Accounting

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