Question

Eli Lilly is very excited because sales for his nursery and plant company are expected to double from $600,000 to $1,200,000 next year. Eli 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.

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. (Negative amount should be indicated by a minus sign.)

Answer 1

ending cash balance = -$84,000

Since the profits are not enough to cover asset buildup, he will probably need to borrow money to cover them. Even though his company will be more profitable, its cash position will not be very healthy.

Step-by-step explanation:

current sales $600,000

net assets = equity = $300,000

return = $600,000 x 8% = $48,000

next year's sales $1,200,000

net assets = equity = $600,000

return = $1,200,000 x 8% = $96,000

asset buildup = $600,000 - $300,000 = $300,000

ending cash balance = beginning cash balance + profit - asset buildup = $120,000 + $96,000 - $300,000 = -$84,000