Q 1: Will the proposed max loan of $350 , 000 be sufficient to fund the firm in 2007 if Jones continues with their current payment practices ?\\ Exhibit 1 : Income Statements ( thousands of dollars ) CONCEPTUAL HINT :` for Years Ending December 31 , 2004 - 2006 , and for the first quarter 2007 1 ) Go through the Yum ! Practice problem first , then like Yum ! , in your solution forecast the* Q1 managerial balance sheet instead of the financial balance sheet ." 2004 2005 2006 2007 2 Net sales $1 , 624 $1 , 916 $2 , 242 8095 CALCULATION HINTS :" Cost of goods sold $1 , 304 $ 1 , 535 $1 , 818 $49 9 Gross profit on sales $320 $381 $424 $109 2 ) Use 2006 ratios for your calculations 2 . Assume that Mr. Jones believes to meet daily requirements he must maintain at least BGS 1 % of cash relative to sales* Operating expense !) $307 $347 85 b . Calculate depreciation\\ Interest expense $ 27 $30 $31 i . Explanation : Paolo always includes a line for depreciation in his examples , this Net income before taxes $21 $14 $46 number is important later when we calculate free cash flow . In the case , you are only given COGS which does not itemize depreciation . ( Given COGS = True COGS Provision for income taxes $15 915 $2 + depreciation ) . We would like to separate out the depreciation so that we can Net income $14 $29 530 $5 make logical assumptions about it and use it in calculations later . By looking at the balance sheet you can use the change in accumulated depreciation to " back out " what the depreciation was . ( Given COGS [ year # ] = True COGS + ( accum dep Exhibit 2: Balance Sheet ( thousands of dollars ) [ year + ] - accum dep [year t- 1] . You report what you calculate for depreciation as of December 31 , 2004 - 2006 and March 31 , 2007 on a new line in your income statement and then report only the updated True* Q1 COGS. Your net income should remain the same ." 2004 2005 2006 2007 Cash EES $45 $53 $23 3 ) For any analysis going forward , use NET fixed assets . You can completely ignore ( to the point of Accounts receivable $187 $ 231 $264 $ 290 not including it in your tables ) the accumulated depreciation and gross fixed asset lines ( after Inventory* $243 $278 $379 $ 432 completing # 5 above ) .\\ Total Current Assets $475 $562 $666 $755 4 ) Total current assets Q 1 of 2007 = 755 which does not equal 32 + 290 + 432 = 754 . So you can Property & equipment* $187 $202 $252 $ 252 assume cash = 33 , thus the equality is true : 755 = 33 + 290 + 432 .` Accumulated depreciation* ( $74 ) ( $99 ) $134 ) ( $ 1 42 ) Total PP &E , net $1 13 $103 $118 $1 10 2 2 : How large of a loan would be needed by year end 2007 to allow Jones Electrical to take advantage* of the discount offered by his suppliers ? Consider the impact of these discounts on COGS and Inventory* Total Assets 5.588 $66.5 $784 $865 as well . You can assume dividends are SO ." Note : This problem requires Excel to iterate circular references OR use goal seek . Accounts payable* $56 $42 $120 $203 Line of credit payable $149 $ 214 $249 $ 250 Accrued expenses $13 $14 $14 $1 2 Q3: Should Jones try to increase their access to debt financing given the price discount offered ?" Long term debt , current portion $24 $ 24 $ 24 $ 24 Total Current liabilities $222 $294 $407 $489 HINT : Try to figure out the annual interest rate that the supplier is effectively charging . Long-term debt $ 182 $158 $134 $128 Total liabilities $404 $452 $541 $617 1 . Does this firm appear to be managed well and have a business model worth investing in ? If it is a profitable business , why are they struggling to stay in good standing with their trade accounts ?" Net worth $184 $213 $243 $248 2 . What is your assessment of how well Mr. Jones is managing his working capital and liquidity ?" Total Liabilities and Net Worth $588 $665 $784 $865