Do Not Copy. Order Custom, Original Paper.

(i) Eli Lilly is very excited because sales for his nursery and plant company are expected to double from \$600,000 to \$1,200,000 next year. Eli notes that net assets (Assets — Liabilities) will remain at 50 percent of sales. His firm will enjoy an 8 percent return on total sales. He will start the year with \$120,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit. (ii) In problem 1 if there had been no increase in sales and all other facts were the same, what would Eli’s ending cash balance be? What lesson do the examples in problems 1 and 2 illustrate?

(i) The calculation starts with the beginning cash which is subtracted the asset buildup and then added in profit. As to why subtract the asset buildup? This is because the calculation should be working with net assets (assets and liabilities), which is short for “assets not financed with debt”. Because any asset not financed with debt in reality must be funded either with fresh equity or with retained earnings, the total \$300,000 increase in assets needs to be supported by an increase in debt (Jensson, 2006).

Beginning cash \$120,000
Asset buildup (300,000) (50%* \$1,200,000)
Profit 96,000 (8%* \$1,200,000)
Ending cash (\$84,000) Deficit

Therefore, his optimistic outlook for his cash position is wrong. Cash will be in a deficit.

(ii) In problem 1 if there had been no increase in sales and all other facts, the new calculation is shown below.

Beginning cash \$120,000
Asset buildup (0)
Profit 48,000 (8%* \$600,000)
Ending cash \$168,000 Balance

Therefore, even though no increase in sales, Eli Lilly would end up with cash balance but not deficit.

From the examples in problem 1 and 2, we can learn the lessons that higher sales may not translate into higher cash flow. The more sales obtain, the more financing requirements needed (Dechow et al., 1998). For example, the cash may be used for building up inventories, which may depreciate in value or even become obsolete if the inventories are not sold in a timely manner. Inventories are valued as assets since they tie up capital; hence they are expected to be sold as soon as possible so that realizing investment return. The expenses of building up inventories are not recorded until products are actually sold. Inventories become liabilities when life cycle ends either because of expiry or by becoming discounted/ obsolete (Buzacott & Zhang, 2004).

In problem 1 even though the company’s sales are expected to double, the assets remain 50% of the increased sales, which leads to significant cash reduction even for a potential profitable firm. In order to ensure cash balance, Eli Lilly should try to sell the liquid assets such as inventories as soon as possible. On the other hand, because the sales keep the same in problem 2, there is no more capital needed to build up assets. All in all, increasing sales not necessarily lead to more cash balance.

References:
Buzacott, J. A., & Zhang, R. Q. (2004). Inventory management with asset-based financing. Management Science, 50(9), 1274-1292.

Dechow, P. M., Kothari, S. P., & L Watts, R. (1998). The relation between earnings and cash flows. Journal of Accounting and Economics, 25(2), 133-168.

Jensson, P. (2006). Profitability Assessment Model. Reykjavík, Iceland.

• StudyAcer

4.7/5
• Trustpilot

4.6/5
• Sitejabber

4.6/5

Need help with writing Business finance Essay?

Dr.JamesPhD

Rating: 4.9/5    Reviews 373

Success rate 97%

Completed projects: 592

Hello, I am a full-time professional freelance writer with over 6 years experience in academic writing. I have a PhD in Strategic Management and have done several projects in business management, marketing and other subjects. This experience has helped me reinforce my ability to work in various fields and handle simple and complex topics. I am a...

Dr.SUCCESS

Rating: 5/5    Reviews 1326

Success rate 98%

Completed projects: 1976

Hello :) My name is Dr.Success, I've started on my path as a professional writer mostly by writing essays. However, in the years since then, I've written various other academic papers, from research works to book reviews. From Sydney to New York, there are hundreds of students all over the world that are happy with the services I've provided the...

MarvellousTutor

Rating: 5/5    Reviews 371

Success rate 97%

Completed projects: 1173

Hi there! Im MarvellousTutor, your perfect author with huge writing experience in English, Art and Business. What? Need assignment on another subject? No worries: I can deal with anything! If you're dreaming of the reliable, responsible and always-on-time writer, here I am! I manage my time greatly, thus, your deadline is highly important for me...

Prof_Stephen

Rating: 4.7/5    Reviews 891

Success rate 97%

Completed projects: 1136

Hello there! My name is Prof Stephen. I have been a full-time freelance researcher and writer for a period of over 6 years. I have successfully completed over 1000 projects and assignments. I have had a good professional relationship with my clients who always come back for more quality papers since I highly value quality, professionalism, and i...

Prof.TzKelly

Rating: 4.9/5    Reviews 244

Success rate 100%

Completed projects: 479

I'm ProfTzKelly, talented wordsmith, grammar afficionado, and writing machine. I'm written everything from outlines to screenplays and book reviews to advanced research papers. All you have to do to be well on your way to a great grade is chat with me! I'm experienced in all major styles, including APA, MLA, Chicago, Harvard, and Vancouver. You ...

ProfAcer

Rating: 5/5    Reviews 465

Success rate 98%

Completed projects: 852

Hey! My name is ProfAcer, and my goal is to help you to get through a tough period of your life. I've been a student, and I know that the amount of work some professors expect you to do can be unfair and overwhelming. And that's without even accounting for the job you probably have an active social life each student should have. There is no sham...

ProfessorEunice

Rating: 4.9/5    Reviews 412

Success rate 97%

Completed projects: 719

In academic writing, quality, originality, and deadlines are vital, and these are my primary offerings to all my clients. I have two years of experience as a full-time academic writer, with over 300 finance, economics, marketing, business, and general papers written from scratch. Since joining this site, I have also tackled sociology, healthcare...

ProfWriters

Rating: 5/5    Reviews 482

Success rate 97%

Completed projects: 783

Hello, I am Prof Writers, I am a bold, accurate, and experienced tutor committed to providing clients with high quality, original, and timely work. As a writer, proficiency in several disciplines in academic writing is necessary, and that is why I prioritize on delivering quality and appropriate work. Be assured that I will always follow the lai...

Think_Tank

Rating: 4.8/5    Reviews 319

Success rate 99%

Completed projects: 584

Hello! People call me ThinkTank, and I've been earning money as an academic writer for years. With a lot of works under my belt, you can bet that I've dealt with dozens of various topics and different forms of papers, including essays, research papers, and even dissertations. I like the challenge that comes with this job. I first fell in love wi...