Pierre Imports' balance sheet is shown below. The company has credit terms from its suppliers of net 30. However, the company has fallen behind and currently payables represent 50 days purchases. The company wants to increase bank borrowings in order to become current in meeting its trade obligations (that is, to have 30 days' payables outstanding).
Balance Sheet (in thousands)
Cash 200 Accounts payable 1200
Accounts receivable 600 Bank loans 1400
Inventory 2,800 Accruals 400
Current assets 3,600 Current liabilities 3,000
Land and buildings 1,200 Mortgage on real estate 1,400
Equipment 800 Common stock, $0.10 par 700
Retained earnings 500
Total assets 5,600 Total liabilities and equity 5,600
See attached file for full problem description.
Payables deferral period = Payables/Credit purchases per day
50 days = 1,200/Credit purchases per day
Credit purchases per day = 24
If the company would like to become current in meeting its trade obligations, its accounts payable should ...
This solution is comprised of a detailed explanation to find how much bank financing is needed to eliminate the past-due accounts payable and whether the bank likely to make the loan or not.