Consider the following potential events that might have occurred to Global on De
ID: 2819318 • Letter: C
Question
Consider the following potential events that might have occurred to Global on December 30, 2016. For each one, indicate which line items in Global's balance sheet would be affected and by how much. Also indicate the change to Global's book value of equity. a. Global used $ 19.9 million of its available cash to repay $ 19.9 million of its long-term debt. b. A warehouse fire destroyed $ 4.5 million worth of uninsured inventory. c. Global used $ 4.8 million in cash and $ 5.5 million in new long-term debt to purchase a $ 10.3 million building. d. A large customer owing $ 3.2 million for products it already received declared bankruptcy, leaving no possibility that Global would ever receive payment. e. Global's engineers discover a new manufacturing process that will cut the cost of its flagship product by more than 47 %. f. A key competitor announces a radical new pricing policy that will drastically undercut Global's prices.
Explanation / Answer
(a) Global used its $19.9 million cash to repay its $19.9 million long term debt.
Due to this transaction, cash would decrease by $19.9 million and non current liabilities would decrease by the same amount since long term debt is a part of non current liabilities. It will have no affect on equity.
(b) A warehouse fire destroyed $4.5 million of uninsured inventory.
Due to this event, inventory will decrease by $4.5 million and equity willalso decrease by the same amount.
(c) Global used $4.8 million in cash and $5.5 million in new long term debt to purchase $10.3 million building.
Due to this transaction, cash will decrease by $4.8 million and new long term debt will increase by $5.5 and non current assets will increase by $10.3 million since building is a part of non current assets.
It will have no affect on equity.
(d) A large customer owing $3.2 million for products it already received declared bankruptcy, leaving no possibility that Global would ever receive payment.
Due to this event, receivables of Global will decrease by $3.2 million and since it is a loss due to bad debt, hence equity will also reduce by the same amount.
(e)
Discovery of a new production technique which reduces production cost, is a non monetary event. It does not involve any money. It cannot be reorded in the books of accounts due to money measurement principle. In the future, equity will increase due to decrease in cost of production and increase in profits.
(f)
Competitor's pricing policy is a non-monetary event. It does not involve any money. It cannot be reorded in the books of accounts due to money measurement principle. In the future, equity will decrease due to decrease in profits.
Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.