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Ross5eChap27sm - Chapter 27 ShortTerm Finance and Planning...

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Chapter 27: Short–Term Finance and Planning 27.1 Start with the basic balance sheet equation, and substitute known definitions: Assets = Liabilities + Equity Current Assets + Fixed Assets = Current Liabilities + Long–Term Debt + Equity Since Net Working Capital = Current Assets – Current Liabilities, subtract Current Liabilities from both sides and substitute NWC: Net Working Capital + Fixed Assets = Long–Term Debt + Equity and we know that Current Assets = Cash + Other Current Assets, so we can substitute as: Cash + Other Current Assets – Current Liabilities = Long–Term Debt + Equity – Fixed Assets Then finally write in terms of cash: Cash = Long–Term Debt + Equity – Net Working Capital (excluding cash) – Fixed Assets 27.2 a. Decrease b. Decrease c. No change d. Increase e. No change f. No change g. Increase h. No change i. Increase j. Decrease k. Increase l. No change m. No change n. No change o. Decrease p. Decrease q. No change r. Decrease Answers to End–of–Chapter Problems B–139
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27.3 Sources and Uses of Cash 20X9 Sources of cash: Cash from operations Net income $101,418 Depreciation $5,852 New stock $1,000 Total sources of cash $108,270 Uses of cash: Increase in fixed assets $10,067 Dividends $40,567 Increase in net working capital Investment in inventory $1,575 Increase in accounts receivable $9,425 Decrease in accrued expenses $1,129 Decrease in accounts payable $37,257 Total uses of cash $100,020 Change in cash balance $8,250 27.4 Sources and Uses of Cash 20X2 Sources of cash: Cash from operations Net income $24,000 Depreciation $54,000 Total cash flow from operations $78,000 Decrease in net working capital Increase in accounts payable $1,542,000 Increase in loans payable $520,000 Increase in taxes payable $8,000 Increase in accrued expenses $1,290,000 Total sources of cash $3,438,000 Uses of cash: Increase in fixed assets $1,590,000 Dividends $40,000 Increase in net working capital Increase in Inventory $1,065,000 Increase in accounts receivable $588,000 Total uses of cash $3,283,000 Change in cash balance $155,000 Answers to End–of–Chapter Problems B–140
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27.5 First find the applicable component ratios: 5 2 / ) 58 42 ( 250 Inventory Average Sold Good of Costs turnover = + = = Inventory 156 . 7 2 / ) 52 31 ( 297 s Receivable Average Sales Credit turnover eceivable = + = = R 195 . 12 2 / ) 30 11 ( 250 Payables Average Sold Good of Costs turnover payabl ccounts = + = = A 73 5 365 turnover inventory year per days inventory in ays = = = D 51 156 . 7 365 turnover s receivable year per days receivable in ays = = = D 93 . 29 195 . 12 365 turnover payables accounts year per days payables in ays = = = D a. Operating cycle = Days in Inventory +Days in Receivables = 73 +51 = 124 days b. Cash cycle = Operating cycle – Days in Payables = 124 – 29.93 = 94.07 days 27.6 a. Increase. b. Increase. c. Decrease. d. No change. e. Increase. f. No change. 27.7 a. Increase; Increase. If the terms of the cash discount are made less favorable to customers, the accounts receivable period will lengthen. This will increase both the cash cycle and the operating cycle.
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