Question

Projected Income statement for Year Ending Dec 31, 2004							Projected balance sheet at December 31, 2004
					Amount		Assets					Amount
Projected sales					$3,600		Cash (1.5% of sales)					54
COGS							Accounts receivable (12% of sales)					432
Beginning inventory					$418		Inventory (16% of sales)					576
Purchases					$2,750		Current assets					0
					$3,168		PP&E (grow with sales)					210
Ending inventory					$576		Total assets					1,272
COGS (72% of sales)					$2,592
Gross profit					$1,008		Liabilities
Less: Operating expenses (25% of sales)					$900		Notes payable (AFN = plug)					675
Operating income					$108		Accounts payable					75
Plus: Purchase discounts (2% of (2750-660))					$42		Accrued expenses					52
Less: Interest					$46		Long-term debt - current portion					7
Net income before taxes					$90		Current liabilities					852
Provision for income taxes*					$19		Long term debt					43
Net income after taxes					$71		Total liabilities					844
							Net worth					428
* 15% rate on first $50K							Total liabilities and net worth					1272
25% on next $25K
34% thereafter Would a credit line of $465,000 be sufficent to meet the companies needs?

Answer 1

To look at the liquidity ability of the company, we analyze their liquidity ratio like current ratio which is current assets / current liabiliy. Here. CA = $ 1062 and CL = 852. Thus Current Ratio = 1.25 which can be considered good and indicates company have enough current assets to pay back short term liabilities. Looking at the financials, company is having net income after tax of $ 71 as well as its net worth also of $ 428 which indicated company is not only profitable but have enough assets to pay back all the liabilities.

Loans are required to finance the company operations, if the company is profitable one may consider it as operating properly and have enough liquidity supported by own cash and capital as well as loans. Thus $ 465000 is sufficient to meet the company needs/