We forecasted the financial statements

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Question

In scenario B, we forecasted the financial statements under the assumption that GLC uses the trade discount of 2%. We added back a trade discount "profit" of $44,000 [(Forecasted purchases 2014 - Purchases first quarter 2014)*2%] to income before taxes leading us to a final net income of $53,000. Even though the net income in Scenario B is higher than the year before, the profitability decreases from 1.63% in 2013 to 1.39% in 2014 due to higher interest expenses from larger debt. We do not agree with Mr. Lumber's estimate of the company's loan requirements. We calculated the required loan Mr. Gilbert would need to finance his expansion plans. If Mr. Gilbert continues operations like the previous years without using the trade discount (Scenario A) he would need a loan of $474,000, which is slightly higher than the expected loan of $465,000. If he reduces his DPO and takes advantage of the trade discount (Scenario B) it would be necessary a loan of $712,000, which shows that besides the cost savings from the discount, this approach would require even more financing.

Reference no: EM133971386

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