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
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
• 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
• 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
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
question 4 What was Donahoo’s cash fl ow for the month
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
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