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F. Naz
F. Naz, Chartered Accountant
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Given the following information: Total assets $100,000 Debt

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Given the following information:

Total assets
$100,000

Debt (12% interest rate)
$80,000

Equity
$20,000

Variable costs of production
$14 per unit

Fixed cost of production
$27,000

Units Sold
12,300

Sales price
$19.75 per unit


What happens to operating income and net income if output is increased by 10 percent? Verify your answer.
A firm needs $100 to start and has the following expectations:

Sales
$200

Expenses
$185

Tax rate
33% of earnings



What are earnings if the owners invest the $100?
If the firm borrows $40 of the $100 at an interest rate of 10%, what are the firm's net earnings?
What is the return on the owners' investment in each case? Why do the returns differ?
If expenses rise to $194, what will be the returns in each case?
In which case did the returns decline more?
What generalization can you draw from the above?
A firm with sales of $5,000 has the following balance sheet:
Assets, Liabilities and Equity as of xx/xx/xx

Assets
Liabilities and Equity

Accounts receivable
$1,300
Accounts payable
$1,200

Inventory
1,600
Long-term debt
2,500

Plant
1,700
Equity
900

Total
$4,600
Total
$4,600


The firm earns 20 percent on sales and expects those sales to rise to $5,500. The increased sales may require additional financing. Accounts receivable and inventory will increase, and trade accounts will also spontaneously increase with the increase in sales. Management expects to distribute 75% of earnings.

Determine the new balance sheet entries for those assets and liabilities that spontaneously change with the level of sales using the percent of sales technique. (Accounts receivable, inventory, and accounts payable vary with sales; the other entries do not). Round off to nearest percentage point, such as 22% or .22.
Will the firm need external financing to achieve sales of $5,500?
Construct the pro forma balance sheet for sales of $5,500. Any new financing should be obtained by issuing new long‑term debt. Any excess funds should be held in cash.

Muhammad Jawaad Ahmed :

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