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 fi rm’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 fi nanced 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 fi rm 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 fi rm’s life? question 2 What did the fi rm’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 fl ow for the month of January? sItuatIOn 1 David Bernstein needs help fi nancing 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 off er Bernstein as to both appropriate and inappropriate sources of fi nancing in his situation?