Part 1 At The End Of Chapter 10: Read Situation 1 And Use Th

Part 1at The End Of Chapter 10 Read Situation 1 And Using The Questi

Part 1: 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 firm’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 financed 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 firm 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 firm’s life?

Question 2: What did the firm’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 flow for the month of January?

Situation 1: David Bernstein needs help financing 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 offer Bernstein as to both appropriate and inappropriate sources of financing in his situation?

Paper For Above instruction

The case of Donahoo Western Furnishings Company offers a comprehensive view of initial and transactional financial analysis for a new business. Analyzing the startup’s balance sheet at inception reveals its reliance on a mix of equity and debt, with initial cash holdings corresponding to the startup capital. Post-transactions, the balance sheet reflects inventory purchases, credit sales, payments, and dividends, illustrating the evolving financial position over the month. The income statement calculation for January, considering revenue, costs, and interest expenses, demonstrates how small business accounting operates without tax considerations, and highlights the importance of cash flow management during expansion phases. Conversely, Bernstein’s scenario of seeking capital for Access Direct underscores the strategic considerations in raising external funding—balancing the need for growth with potential risks associated with different sources of capital. His openness to various options suggests flexibility, but also necessitates caution in choosing credible, appropriate financing channels. Both cases illustrate the importance of prudent financial planning, understanding of credit, and risk assessment when expanding or initiating business operations.

In the case of Donahoo Western Furnishings, the initial balance sheet comprised primarily cash, inventory, and equity, with long-term debt accounted for as a liability. As transactions occurred, assets increased with inventory acquisitions and receivables, while liabilities grew through trade credit. Selling furniture reduced inventory and generated receivables and cash, impacting net income and cash flow. The calculation of January income showed revenue earned minus cost of goods sold and operational expenses, including interest on debt, resulting in a clear profit for the period. This process underscores the importance of accurate record-keeping and understanding of working capital in small-business finance.

When evaluating Bernstein's scenario, the emphasis shifts to strategic financial planning. His recognition that additional funding is needed demonstrates an understanding of the growth cycle. However, the choice of capital sources must align with the company’s risk profile and operational goals. Venture capital investments might come with input expectations and control considerations, while bank loans could impose solid repayment obligations but might be more straightforward to manage. Personal or owner financing remains an alternative, but may limit growth potential. Advisors should recommend evaluating the terms, costs, and implications of each option, emphasizing transparent, manageable, and mission-aligned funding sources to ensure sustainable growth.

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