FHCE 3200 Lecture Notes - Lecture 4: Social Capital, Human Capital, Behavioral Economics
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2. Balance sheet
The balance sheet provides a snapshot of the financial conditionof a company. Investors and analysts use the information given onthe balance sheet and other financial statements to make severalinterpretations regarding the companyâs financial condition andperformance.
Blue Hamster Manufacturing Inc. is a hypothetical company.Suppose it has the following balance sheet items reported at theend of its first year of operation. For the second year, some partsare still incomplete. Use the information given to complete thebalance sheets for Blue Hamster Manufacturing Inc. for the yearsending December 31, Year 2 and 1, respectively.
Blue Hamster Manufacturing Inc. | |||||
|---|---|---|---|---|---|
Balance Sheet | |||||
For the Year ended December 31 | |||||
| Year 2 | Year 1 | Year 2 | Year 1 | ||
| Assets | Liabilities and equity | ||||
| Current assets: | Current liabilities: | ||||
| Cash and equivalents | $55,350 | Accounts payable | $0 | $0 | |
| Accounts receivable | $25,312 | $20,250 | Accruals | $3,516 | $0 |
| Inventories | $74,250 | $59,400 | Notes payable | $19,921 | $18,750 |
| Total current assets | $168,750 | $135,000 | Total current liabilities | $18,750 | |
| Net fixed assets: | Long-term debt | $70,312 | $56,250 | ||
| Net plant and equipment | $165,000 | Total debt | $93,750 | $75,000 | |
| Common equity: | |||||
| Common stock | $182,812 | $146,250 | |||
| Retained earnings | $78,750 | ||||
| Total common equity | $281,250 | $225,000 | |||
| Total assets | $375,000 | $300,000 | Total liabilities and equity | $375,000 | $300,000 |
Given the information in the preceding balance sheetâandassuming that Blue Hamster Manufacturing Inc. has 50 million sharesof common stock outstandingâread each of the following statements,then identify the selection that best interprets the informationconveyed by the balance sheet.
Statement #1: Blue Hamsterâs pool of relatively liquid assets,which are available to support the companyâs current and futuresales, decreased from Year 1 to Year 2.
This statement is , because:
Blue Hamsterâs total current liabilities balance decreased by$33,750 between Year 1 and Year 2.
Blue Hamsterâs total current liabilities balance increased from$20,250 to $25,312 between Year 1 and Year 2.
Blue Hamsterâs total current asset balance actually increasedfrom $135,000 to $168,750 between Year 1 and Year 2.
Blue Hamsterâs total current asset balance decreased from$168,750 to $135,000 between Year 1 and Year 2.
Statement #2: In Year 2, Blue Hamster Manufacturing Inc. wasprofitable.
This statement is , because:
Blue Hamsterâs retained earnings account increased between theend of Years 1 and 2.
The cash and equivalents account increased between Years 1 and2.
Blue Hamsterâs total assets increased between Years 1 and 2.
Statement #3: The book value per share of Blue Hamsterâs stockin Year 2 was $5,625.
This statement is , because:
The per-share book value is calculated by dividing the companyâstotal assets by the number of outstanding shares of commonstock.
The per-share book value is calculated by dividing the companyâstotal debt by the number of outstanding shares of common stock.
The per-share book value is calculated by dividing the companyâstotal common equity by the number of outstanding shares of commonstock.
Based on your understanding of the different items reported onthe balance sheet and the information they provide, if everythingelse remains the same, then the cash and equivalents item on thecurrent balance sheet is likely to if the firm issues$3 million of new common stock.
Based on your understanding of the different items reported inthe balance sheet and the information they provide, which statementregarding Blue Hamster Manufacturing Inc.âs balance sheet isconsistent with U.S. Generally Accepted Accounting Principles(GAAP)?
The companyâs assets should be listed in alphabetical order.
The companyâs assets should be listed in the order in which theyare to be converted into cash.
The companyâs assets should be listed from those carrying thelargest balance to those with the smallest balance.
The 2015 financial statements for Growth Industries are presented below:
| INCOME STATEMENT, 2015 | |||
| Sales | $ | 330,000 | |
| Costs | 215,000 | ||
| EBIT | $ | 115,000 | |
| Interest expense | 23,000 | ||
| Taxable income | $ | 92,000 | |
| Taxes (at 35%) | 32,200 | ||
| Net income | $ | 59,800 | |
| Dividends | $ 35,880 | ||
| Addition to retained earnings | 23,920 | | |
BALANCE SHEET, YEAR-END, 2015
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $ | 9,000 | Accounts payable | $ | 16,000 |
| Accounts receivable | 14,000 | Total current liabilities | $ | 16,000 | |
| Inventories | 37,000 | Long-term debt | 230,000 | ||
| Total current assets | $ | 60,000 | Stockholdersâ equity | ||
| Net plant and equipment | 270,000 | Common stock plus additional paid-in capital | 15,000 | ||
| Retained earnings | 69,000 | ||||
| Total assets | $ | 330,000 | Total liabilities and stockholdersâ equity | $ | 330,000 |
Sales and costs in 2016 are projected to be 30% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60.
| What is the required external financing over the next year? |
Even if sales increase by 30%, the firm still has more than enough fixed assets to meet production. Only working capital will increase.
Net working capital of the firm in 2015 was $____
The increase in net working capital will be $____, which is less than the increase in the retained earnings.
Thus required external financing is $_____
A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.
| The 2015 financial statements for Growth Industries are presented below: |
| INCOME STATEMENT, 2015 | |||
| Sales | $ | 340,000 | |
| Costs | 220,000 | ||
| EBIT | $ | 120,000 | |
| Interest expense | 24,000 | ||
| Taxable income | $ | 96,000 | |
| Taxes (at 35%) | 33,600 | ||
| Net income | $ | 62,400 | |
| Dividends | $ 18,720 | ||
| Addition to retained earnings | 43,680 | ||
| BALANCE SHEET, YEAR-END, 2015 | |||||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $ | 3,000 | Accounts payable | $ | 10,000 |
| Accounts receivable | 8,000 | Total current liabilities | $ | 10,000 | |
| Inventories | 29,000 | Long-term debt | 240,000 | ||
| Total current assets | $ | 40,000 | Stockholdersâ equity | ||
| Net plant and equipment | 280,000 | Common stock plus additional paid-in capital | 15,000 | ||
| Retained earnings | 55,000 | ||||
| Total assets | $ | 320,000 | Total liabilities and stockholdersâ equity | $ | 320,000 |
| Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .30. |
| What is the required external financing over the next year? |
| Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity. |
