question archive Tarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics
Tarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics
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Tarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics. Tarheel expects to earn $1 million after tax on the venture during the first year. The president of Tarheel wants to know what the subsidiary’s balance sheet would look like. The president believes that it would be advisable to begin the new venture with ratios that are similar to the industry average. Tarheel plans to make all sales on credit. All calculations assume a 365-day year. In your computations, you should round all numbers to the nearest $1,000. Based upon the industry average financial ratios presented here, complete the projected balance sheet for Tarheel’s upholstery subsidiary.
Please explain all calculations, Thank you.
Industry Averages Current ratio 2:1
Quick ratio 1:1
Net profit margin ratio 5 percent
Average collection period 20 days
Debt ratio 40 percent
Total asset turnover ratio 2 times
Current liabilities/stockholders’ equity 20 percent
Forecasted Upholstery Subsidiary Balance Sheet
Cash
Total current liabilities
Accounts receivable
Long-term debt
Inventory
Total debt
Total current assets
Stockholders’ equity
Net fixed assets
Total liabilities and stockholders’ equity
Total assets
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Answer: Net fixed assets |
7600 |
| Cash | 104.11 |
| Accounts receivable | 1095.89 |
| Inventory | 1200 |
| Total Current Assets | 2400 |
| Total assets | 10000 |
| Current Liabilities | 1200 |
| Long term debt | 2800 |
| Total debt | 4000 |
| Stock Holders equity | 6000 |
| Total liabilities and stockholders’ equity | 10000 |
Working Notes
| Net Profit after tax | 1000 |
| Net profit margin ratio | 5% |
| SALES= 1000/5% | 20000 |
| Asset Turnover Ratio | 2 |
| SALES | 20000 |
| Asset 20000/2 | 10000 |
| Average collection period (days) | 20 |
| SALES | 10000 |
| days in year | 365 |
| Account receivable (20000*20)/365 | 1095.89 |
| Debt Ratio | 40% |
| Assets | 10000 |
| Total Debts | 4000 |
| Assets | 10000 |
| Less: Total Debts | 4000 |
| Stockholder's equity | 6000 |
| Current Liabilities/ stockholder equity | 20% |
| Stockholder's equity | 6000 |
| Current Liabilities 6000*20% | 1200 |
| Total debt | 4000 |
| Current Liabilities | 1200 |
| Long term debt (4000-1200) | 2800 |
| Quick Ratio : (Current Assets-Inventory)/Current Liability | 1 |
| Or (Cash+Account receivable)/current liab | 1 |
| Cash 1200-1095.89 | 104.11 |
| Current Assets/ Current Liab | 2 |
| Current Assets: 2*1200 | 2400 |
| Less: Cash | 104.11 |
| Less Account receivable | 1095.89 |
| Inventory | 1200 |
| Total Assets | 10000 |
| Less: Current Assets | 2400 |
| Net Fixed Assets | 7600 |
