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Below are the simplified current and projected financial statements for Decker Enterprises. All of Decker's assets are operating assets. All of Decker's current liabilities are operating liabilities. Income statement Current Projected Sales na 1,500 Costs na 1,080 Profit before tax na 420 Taxes (25%) na 105 Net income na 315 Dividends na 95 Balance sheets Current Projected Current Projected Current assets 100 115 Current liabilities 70 81 Net fixed assets 1,200 1,440 Long-term debt 300 360 Common stock 500 500 Retained earnings 430 650 If Decker had a financing deficit, it could remedy the situation by a. borrowing from retained earnings b. borrowing on its line of credit c. paying down its long-term debt d. buying back common stock e. paying a special dividend

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Answer:

Decker Enterprises

If Decker had a financing deficit, it could remedy the situation by

b. borrowing on its line of credit

Explanation:

a) Data and Calculations:

Income statement         Current    Projected

Sales                                  na             1,500

Costs                                 na             1,080

Profit before tax                na              420

Taxes (25%)                       na              105

Net income                        na              315

Dividends                           na               95

Balance sheets   Current  Projected                               Current  Projected

Current assets         100        115           Current liabilities        70            81

Net fixed assets   1,200     1,440           Long-term debt        300        360

                                                               Common stock        500        500

                                                               Retained earnings   430        650

Total assets         1,300     1,555            Liabilities + Equity 1,300       1,591

Shortfall in projected assets = $36 ($1,591 - $1,555)

b) A company cannot borrow from retained earnings to remedy a financing deficit because financial deficits require external financing from stockholders, debt holders, or financial institutions.  Ordinarily, options c, d, and e involve cash outflows.  They cannot finance a financial deficit.

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