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Chapter 2: 2DQ (page 112)

Explain how the collections and purchases schedules are related to the borrowing needs of the corporation.

Short Answer

Expert verified

The collection and the purchases schedules represent the period in which receivables are collected. When the collections of the organization are unable to cover the financial requirement of the organization, the managers need to look to boorow the funds to cover the deficiency.

Step by step solution

01

Borrowing

Borrowing is defined as the situation in which a person or the company in need of money approach the bank or other financial institution to obtain some form of loan on interest to fulfil their financial needs.

02

Collection and purchase schedule

A collection and purchase schedule is prepared by an organization to measure the speed at which the cash can be collected by an organization from its debtors. Management should refer to these schedules to identify the availability of the funds and decide the amount of borrowing.

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Most popular questions from this chapter

The Haines Corp. shows the following financial data for 20X1 and 20X2:

20X1

20X2

Sales

\(3,230,000

\)3,370,000

Cost of goods sold

2,130,000

2,850,000

Gross profits

\(1,100,000

\)520,000

Selling and administrative expenses

298,000

227,000

Operating profits

\(802,000

\)293,000

Interest expense

47,200

51,600

Income before taxes

\(754,800

\)241,400

Taxes (35%)

264,180

84,490

Income after tax

\(490,620

\)156,910

For each year, compute the following and indicate whether it is increasing or

decreasing profitability in 20X2 as indicated by the ratio:

c. Interest expenses to sales

Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of\(156,000 on sales of \)2,010,000. Division B is able to make only \(28,800 onsales of \)329,000. Based on the profit margins (returns on sales), which divisionis superior?

In 20X2, sales increased to \(5,740,000 and the assets for that year were as follows:

Cash

\)163,000

Accounts receivable

924,000

Inventory

1,063,000

New plant and equipment

520,000

Total assets

$2,670,000

Once again compute the four ratios

b. Compute the following:

1. Accounts receivable turnover.

2. Inventory turnover.

3. Fixed asset turnover.

4. Total asset turnover.

Assume the following data for Cable Corporation and Multi-Media Inc.

Capable corporation

Muli-media inc

Net income

\(31,200

\)140,000

Sales

317,000

2,700,000

Total assets

402,000

965,000

Total debts

163,000

542,000

Stockholder鈥檚 equity

239,000

423,000

c. Discuss the factors from part b that added or detracted from one firm

having a higher return on stockholders鈥� equity than the other firm as

computed in part a.

In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status

Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.

b. To what do you attribute the phenomenon shown in part a?
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