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Homework answers / question archive / For questions 1 to 5: A commercial company initially sells €600 a year
For questions 1 to 5: A commercial company initially sells €600 a year. Sales are uniform. COGS = 70% of sales.
Question 1) If receivables = €200, what are the days of collection?
90 days
30 days
60 days
120 days
Question 2) If inventory = €105, what are the days of inventory?
90 days
120 days
180 days
60 days
Question 3) The days of collection change to 90 days. You will therefore have in receivables:
€300
€150
€250
€100
Question 4) If sales now grow 20% and days of collection are 120 like in question 1, then:
The company is doing better, and receivables will actually decrease 20%.
Receivables also grow 20%, and thus will be €280.
Receivables will not change; they will stay at €200.
Receivables also grow 20% and thus will be €240.
Question 5) Imagine now that sales are €720 like in the previous question, days of collection are 120 and days of inventory are 90. The company manages a just-in-time delivery that reduces dramatically days of inventory to 10. At the same time, the marketing department, to win new customers and reward existing customers, increases the days of collection to 200. Therefore:
The need of financing increases.
We will need to use less credit, because the need of financing decreases.
The needs of financing do not change, given that the decrease of inventory days (80) are compensated with the increase of collection days (80).
This fact has nothing to do with needs to finance operations.
Question 6) When we do a forecast of the P&L:
We only start with a P&L forecast if we have finished with the balance sheet forecast.
We don't need to make assumptions, only for the balance sheet.
The line of credit in the P&L is always below the gross margin.
We always first make a forecast of sales.
Question 7) When doing a forecast of the Balance Sheet:
In the forecast, cash and credit are always the last items we fill in.
We start with credit lines and cash to make sure financing is secured.
Receivables, inventory, and payables are always the last thing we fill in.
Fixed assets depend on the amount of credit.
Question 8) We use cash or credit as a figure to plug in in order to balance the Balance Sheet. If total assets > (total liabilities + equity), where will the difference go?
Credit
Cash
Question 9) If a company invests as much in fixed assets as it charges in the depreciation per year, then:
The fixed assets in the balance sheet will remain the same.
The fixed assets in the balance sheet will decrease.
The fixed assets in the balance sheet will increase.
Question 10) If equity in 2015 = €600, net income in 2016 = €200 and dividends paid in 2016 = €50, what is the equity at the end of 2016?
€550
€750
€600
€800
Question 11) If long-term debt is €800 in 2015, and I pay back 10% every year of the original €1,000 loan that I received in 2013, and in 2016 I ask for a new loan of €100, then the total amount in long-term debt at the end of 2016 will be:
€850
€700
€800
€750
Answers:
Question 1
Days of collection = receivables * 360 / sales = 200*360/600 = 120 Days
Question 2
Days of inventory = inventory * 360 / COGS = 105 * 360/420 = 90 days
Question 3
If days of collection = 90 days,
receivables = days of collection * sales / 360 = 90*600/360 = Euro150
Question 4
If sales now grow 20% and days of collection are 120 like in question 1, then:
Receivables = days of collection * sales / 360 = 120 * 600 * 120% / 360 = Euro240
Therefore, Receivables also grow 20% and thus will be €240.
Question 5
Imagine now that sales are €720 like in the previous question, days of collection are 120 and days of inventory are 90. The company manages a just-in-time delivery that reduces dramatically days of inventory to 10. At the same time, the marketing department, to win new customers and reward existing customers, increases the days of collection to 200. Therefore:
Receivables = days of collection * sales / 360 = 120 * 720 / 360 = Euro240
Inventory = days of inventory * COGS / 360 = 90 * 720 * 70%/360 = Euro 126
Total = 240 + 126 = Euro366
Revised scenario
Receivables = days of collection * sales / 360 = 200 * 720 / 360 = Euro400
Inventory = days of inventory * COGS / 360 = 10 * 720*70% / 360 = Euro14
Total = 400 + 14 = Euro414
Increase in assets = 414 - 366 = Euro48
Increase in asset means increase in the need of financing.
Therefore the answer is The need of financing increases.
Question 6
When we do a forecast of the P&L: We always first make a forecast of sales.
Question 7
When doing a forecast of the Balance Sheet: We start with credit lines and cash to make sure financing is secured.
Question 8
We use cash or credit as a figure to plug in in order to balance the Balance Sheet. If total assets > (total liabilities + equity), where will the difference go? Credit
Question 9
If a company invests as much in fixed assets as it charges in the depreciation per year, then:
The fixed assets in the balance sheet will remain the same.
Question 10
If equity in 2015 = €600, net income in 2016 = €200 and dividends paid in 2016 = €50, what is the equity at the end of 2016?
2016 year end equity = 600+200-50 = €750
Question 11
If long-term debt is €800 in 2015, and I pay back 10% every year of the original €1,000 loan that I received in 2013, and in 2016 I ask for a new loan of €100, then the total amount in long-term debt at the end of 2016 will be:
2016 year end debt = 800 - (10%*1000)+100 = 800-100+100 = €800
