Chapter 3- Activity 1

Rudsan G. Turqueza Business

Finance
Activity 1
A firm has the following balance sheet
Assets Liabilities and Equity
Cash ₱1,000 Accounts Payable ₱15,000
Marketable 15,000 Accruals 10,000
Securities
Accounts 14,000 Short-term Bank 105,000
Receivable Loan
Inventory 30,000 Long-term Debt 22,000
Plant and 40,000 Common Stock 20,000
Equipment
    Retained Earning 18,000
Total ₱100,000 Total ₱100,000
 Sales are currently ₱100,000, but you expect them to decrease by 20 percent
to ₱80,000, which will require a contraction of assets. You have historically used the
percent of sales technique to forecast selected assets and liabilities (i.e., accounts
receivable, inventory, accounts payable, and accruals) that spontaneously change with
sales.
Other factors that will affect the forecast include (1) the short-term bank loan must be
retired, (2) the plant and equipment are aging and they must be expanded by ₱10,000
to reverse sales decline, (3) the net profit margin on sales is 10 percent, and (4) the
firm does not distribute dividends. In addition, you want to maintain the holdings of
marketable securities. However, if the firm needs funds, you could liquidate the
marketable securities but prefer to issue long-term debt.
To help forecast the firm's future financial position, fill in the forecasted entries prior
to any changes in the firm's use of long-term debt. Some of the numbers have been
provided, and since the entries are anticipated, the sum of the two sides need not be
balanced.

Assets Liabilities and Equity

 Cash ₱ 1,000 Accounts Payable ₱ 12,000
Marketable 15,000  Accruals 8,000 
Securities
Accounts 11,200  Short-term Bank 0 
Receivable Loan
Inventory 24,000  Long-term Debt 22,000
Plant and 50,000  Common Stock 20,000
Equipment
    Retained Earnings 26,000 
Total 101,200  Total 88,000 

 Based on your projections, answer the following questions:

1. Does the firm need additional finance? If the firm needs external finance, how
much is necessary to cover its financial needs?
Yes, in order to cover its financial needs the company needs to cover extra
funding with a minimum of ₱42,000.
2. If the firm liquidates its marketable securities, will that cover its needs for
finance?
Unfortunately, no, the company’s marketable securities are too low to cover all
the needs for finance.
3. The terms of the long-term debt's indenture will not permit additional long-term
debt if the firm's current ratio is less than 2:1. Does the firm meet this condition?
CA
CR =
CL
51,200
CR =
20,000
CR = 2.56
Yes, 2.56 is not less than 2.1 that is why the firm meets the condition.
4. If the firm liquidates the marketable securities, would the answer be different?
Unfortunately, no, since none of the amounts of the accounts has changed there
will be no difference.
5. Will issuing additional debt violate this condition?
Yes, issuing additional debt will change the amount of its account which possibly
leads to violating the condition.

6. Construct a new balance sheet that incorporates the financing changes and meets
the conditions. If the firm has excess funds, add them to cash.
Assets Liabilities and Equity
Cash ₱ 16,000 Accounts Payable ₱ 12,000
Marketable 0  Accruals 8,000 
Securities
Accounts 11,200  Short-term Bank 0 
Receivable Loan
Inventory 24,000  Long-term Debt 22,000
Plant and 50,000  Common Stock 20,000
Equipment
    Retained Earnings 26,000 
Total 101,200  Total 88,000