Question

a) Big Auto Part Inc. is authorized to issue 5,000,000 common shares. In its initial public offering during 2015, Big Parts issued 500,000 common shares for $7.00 per share. Over the next year, Big Auto Part's share price increased and the company issued 400,000 more shares at an average price of $8.50 During the five years from 2015 through 2019, Big Auto Part earned net income of $920,000 and declared and paid cash dividends of $140,000. A 10% stock dividend was distributed to the shareholders in 2015 on the shares outstanding. The market price was $8.00 per share when the stock dividend was distributed. At December 31, 2019, the company has total assets of $14,500,000 and total liabilities of $6,820,000. Requirement: Show the computation of Big Auto Part's total shareholders' equity at December 31, 2019. Present a detailed computation of each element of shareholders' equity. b) Identify and briefly describe four ways to improve cash flows from sales and receivables.

Answer 1

Big Auto Parts Inc. - Computation of Shareholders Equity Authorised Capital 5000000 shares Ways to Improve Cash Flows from Sales and Receivables 1) Offer Discounts for early payments If the creditors are offering some discounts or other benefits to the debtors for early payments of their dues it will make the debtors to maximise their interest of repayment The one creditor who offers the discounts onearly payments will get repaid first as compared to the other creditor of the same debtor Issued , Subscribed and paid up Capital during the year 2015 500000 shares Issue price per Share 7 Total Issued Share Capital during 2015 3500000 Issued , Subscribed and paid up Capital during the year 2016 Issue price per Share 2)Proper Tracking and Contact System with the Debtors: Company should maintain a proper tracking system and cumulatevely contacr with the debtors for the immediete payment An aging will let you know to what extent an account is outstanding. The more days outstanding, the less likely the company will receive payment. Think of the effect on income for all your hard work 400000 shares 8.5 Total Issued Share Capital during 2015 3400000 Stock Dividend Issued: Outstanding Shares (400000 + 500000) 10% of outstanding shares Market Price Value of Share capital 900000 90000 8 720000 3)Promote Cash Sales if Possible Promote the cash sales in all possible situations, which will reduce the bad debts. But make sure that there is no decrease in sales due to such promotion of cash sales. 7620000 Total Share Capital (3,500,000+3,400,000+720,000)

Add: Retained Earnings Net Income Earned during the period from 2015 to 2019 Less : Cash Dividend Retained earnings Less : Stock Dividend Retained Earnings available for outstanding share holders 4)Secured Payment Options A secure pay system option helps the customers pay their invoices promptly. If the company allows for customers to pay with a authorized debit or credit cardor the nent banking system, the customer can easily enter their information and pay for the bill in a matter of minutes. Less hassle for the customer increases probability that the company will be paid on time. 920000 140000 780000 720000 60000 Therefore, Value of Share Capital as on 31 december-2019 7680000 5)Selling the receivables to Collection Agencies Sell the receivables to the debt collection agencies like the method of factoring Selling your bad debt is a last option to capture cash from aged accounts receivable. A collection agency will value the bad debts and then give you an offering amount These accounts are a little more reliable and less risky, you will receive a larger percentage of the account. The factoring company will look at the accounts aging, as well as customers' credit history and payment records. The factoring firm will offer you a rate to purchase the accounts chosen. The factoring firm is likely to choose your better accounts, current from good paying customers. Add: Liabilities 6820000 Assets 14500000
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