Gardner incorporated is very excited because sales for his furniture company are expected to double from $600,000 to $1,200,000 next year. Gardner notes that net assets (Assets - Liabilities) will remain at 50 percent of sales. His firm will enjoy an 8 percent return on total sales. He will start the year with $120,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit.
2. In problem 1 if there had been no increase in sales and all other facts were the same, what would Gardner ending cash balance be? What lesson do the examples in problems 1 and 2 illustrate?
The increase in sales is 600,000.
The net assets are 50% of sales. The increase in assets is 300,000. Cash would be required for this asset buildup. The firm earns 8% on sales. The profit would be 1,200,000X8%=$96,000. The starting cash balance is 120,000. The total cash available would be ...
The solution explains how to calculate the ending cash balance given the increase in sales.