BUSINESS QUESTION (2)

Part 1: 

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At the end of Chapter 10, read Situation 1 and using the questions as a guide, discuss recommendations.

At the end of Chapter 12, read Situation 2 and using the questions as a guide, discuss recommendations.

NOTE: To receive full credit, post your initial response by Wednesday (250 words) and reply to at least two classmates by Sunday (minimum 100 words).  Replies should be substantive and add to the discussion, going beyond a simple, “I agree.”

 

The Donahoo Western Furnishings Company was formed

on December 31, 2010, with $1,000,000 in equity plus

$500,000 in long-term debt. On January 1, 2011, all of the

fi rm’s capital was held in cash. The following transactions

occurred during January 2011.

• January 2: Donahoo purchased $1,000,000 worth of

furniture for resale. It paid $500,000 in cash and fi nanced

the balance using trade credit that required payment in

60 days.

• January 3: Donahoo sold $250,000 worth of furniture that

it had paid $200,000 to acquire. The entire sale was on

credit terms of net 90 days.

• January 15: Donahoo purchased more furniture for

$200,000. This time, it used trade credit for the entire

amount of the purchase, with credit terms of net

60 days.

• January 31: Donahoo sold $500,000 worth of furniture,

for which it had paid $400,000. The furniture was sold

for 10 percent cash down, with the remainder payable

in 90 days. In addition, the fi rm paid a cash dividend of

$100,000 to its stockholders and paid off $250,000 of its

long-term debt.

question 1 What did Donahoo’s balance sheet look like at

the outset of the fi rm’s life?

question 2 What did the fi rm’s balance sheet look like

after each transaction?

question 3 Ignoring taxes, determine how much income

Donahoo earned during January. Prepare an income

statement for the month. Recognize an interest expense

of 1 percent for the month (12 percent annually) on the

$500,000 long-term debt, which has not been paid but

is owed.

question 4 What was Donahoo’s cash fl ow for the month

of January?

 

sItuatIOn 1

David Bernstein needs help fi nancing his Lodi, New Jersey–

based Access Direct, Inc., a six-year-old $3.5 million company.

“We’re ready to get to the next level,” says Bernstein, “ but

we’re not sure which way to go.” Access Direct spruces up

and then sells used computer equipment for corporations.

It is looking for up to $2 million in order to expand. “Venture

capitalists, individual investors, or banks,” says Bernstein, who

owns the company with four partners, “we’ve thought about

them all.”

question 1 What is your impression of Bernstein’s

perspective on raising capital to “get to the next level”?

question 2 What advice would you off er Bernstein as to

both appropriate and inappropriate sources of fi nancing in

his situation?

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