Problem 3 You are considering buying 123Co, a manufacturing company. The president and CFO are traveling and won't be back for two weeks, and the financial statements cannot be released until then. However, you have talked to the daughter of the owner, and have written down the following comments: (1) (2) "We started 123Co two years ago with $3.3 million that dad had inherited." "Our sales have done well, and if we can keep them at last month's performance we would reach $4.2 million a year. We hope to do even better than that." (3) "We bought four and half million dollars of equipment at an auction. It was used period." equipment but had been completely rebuilt, so dad decided on a ten year depreciation "We just rent the space we are in." "We never have any cash or notes in the bank. Dad set up a credit line and we float on that. The bank didn't want to give us long term financing until we were in operation for two years. We are trying to decide right now whether to take out some long term financing and really expand the business, or sell it to you and stay on as operators.'" "At first our draw on our credit line was over 3 million, and the only way we could get it was to have a personal guarantee from my uncle. Lucky for us, the business has gone well and the draw from the bank has dropped over the two years we have been in business. Dad thinks we can get the requirement for a personal guarantee lifted." "When we set up the business, we decided to leave the depreciation in the business. We also decided to set up an objective for ourselves of leaving a quarter million dollars of net income per year in the company, and treating ourselves to a dividend on everything else. So far we have met our objective." "We play it safe on inventory. It is running 35 days of sales, which is a lot considering our materials cost is only 50% of sales. we could probably bring it down, but we have just been too busy filling orders." (4) (5) (6) (7) (8) (9) "We have been stringing our suppliers out 50 days. We have to talk to them every month to assure them we are doing ok, but it has worked so far. Because our sales grew to $350,000 last month and we have stayed with the same suppliers, they haven't minded our slow pay." (10) "Our prepaids are so small we ignore them. Our accountant said that they weren't (11) "We are current on taxes. Dad knew a guy that lost his business because of unpaid taxes, (12) "Our payroll is two weeks behind, but it isn't a big deal because our staff is only 22 with (13) "Our customers are large companies, and they are sure slow to pay. Our receivables are (14) "We are still getting by on the original equipment we bought." material, and that we could just expense this stuff as we spent it." so he has insisted on a monthly payment to keep us current." an average salary of $4,000 per month. Otherwise we are current on all our expenses." ning 55 days Questions: 1. Try to do up a balance sheet for the company, making reasonable assumptions where 2. Do you need the income statement to prepare the balance sheet in this case? Would you necessary be able to make an intelligent decision about whether to buy the business without looking at the income statement? Why? What percentage of the total assets is tied up in inventory and receivables? 3. 123Co Balance Sheet ($000) Assets Liabilities urrent Asset: Cash Receivables Short Term Investments Inventory Prepaid Expenses urrent Liabilities: Short Term Credit Line Accounts Payable Accrued Expenses Taxes Payable Current Portion of Long Term Debt Fixed Assets: Land, Bld & Equip at Cost Less Accumulated Depreciatiorn Long Term Debt: Repayable Grants Long Term Debt Long Term Investments Goodwill Shareholders Equity: Capital Shares Retained Earnings Total Assets Total Liability and Equity