True and False

# True False 1 2 3 Question Cash 0 = + long-term debt 100 + equity 100 + accounts payable 100 accounts receivable 0 inventory 100 fixed assets 200 The company is using a conservative financing strategy Time 1: Sales = 500 and Cash 50 =+ long-term debt 100 + capital stock 100 + opening retained earnings 0 + net income 50 + current liabilities 100 inventory 100 fixed assets 200 Time 2: Sales = 750 and Cash 125 =+ long-term debt 100 + capital stock 100 + opening retained earnings 50 + net income 75 + current liabilities 100 inventory 100 - fixed assets 200. Profits (net income) are the source of cash in Time 2 Year-end #1: Cash 0 = + long-term debt 100 + capital stock 100+ opening retained earnings 50+ net income 50 + accounts payable 100 - accounts receivable 150 inventory 50 fixed assets 200. Year-end #2: Cash 100 = + long-term debt 150 + capital stock 150 + opening retained earnings 100 + net income 0 + accounts payable 100 accounts receivable 150 inventory 50 - fixed assets 200. The company improved its cash position through long-term sources from financing. Year-end #1: Sales 200 (gross margin 50%) and Cash 0 = + long- term debt 100 + capital stock 100 + opening retained earnings 50 + net income 50 + accounts payable 100 - accounts receivable 150 inventory 50 fixed assets 200. Year-end #2: Sales 200 (gross margin 50%) and Cash 0 = + long- term debt 100 + capital stock 100 + opening retained earnings 100 + net income 0 + accounts payable 150 accounts receivable 100 - inventory 50 - fixed assets 300 4