Question

The firm currently uses straight line depreciation so that depreciation expense in 2017 will be the...

The firm currently uses straight line depreciation so that depreciation expense in 2017 will be the same as in 2018. Depreciation expense in 2017 was $5,000. Sales are expected to grow by 30% in 2018. All net income is paid out in dividends and no new stock issues are planned. Notes payable at the end of 2017 will be paid off in 2018.

Calculate projected total assets and additional funds needed for 2018.

End of year 2017

            Cash                                            $15,000                  

            Accounts Receivable                     20,000

            Inventory 35,000

            Fixed Assets, gross                       75,000

            Accumulated Depreciation 15,000                  

            Fixed Assets, net                          60,000

            Accounts Payable                         15,000

            Notes Payable                               25,000

            Long-Term Debt 30,000

Common Equity 60,000

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Answer #1

Total Assets in 2017 = Cash + AR + Inventory + Net Fixed Assets = 15000+20000+35000+60000 = $ 130000

Depreciation amount in Year 2018 is same as that of Year 2017 , so Depreciation amount = $ 5000

Net fixed Assets in Year 2018 = $ 60000-$ 5000 = $ 55000

Notes payable in 2017 =$ 25000 to be paid in 2018

As mentioned in the question, no new stock issue is planned, therefore there will be no change in Stock value in 2018 , and it will be at same level of $ 35000

Also, as mentioned in the question, Sales will increase by 30% in 2018, it is assumed that Accounts receivables will also increase by 30% from last year i.e. $ 20000 + 30% = $ 26000

Similarly, on the basis of increase in Sales, purchase will also be increased by 30% , so, Accounts payable in 2018 will be $ 15000 + 30% = $19500

Total Assets in 2018 =Accounts Payable + Equity + Debt = 19500+60000+30000 = $ 109500

Also , Assets will be reduced by $ 25000 on payment of Notes

Cash Balance in 2018 = $ 109500 - (Net FA +AR + Inventory-25000) = $ 109500 - 55000 - 26000 - 35000 +25000 = $ 18500

Additional net cash requirement will be $18500 - $ 15000 = $ 3500

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