Every line from a driver; the difference is financing

From the budgeted income statement to the budgeted balance sheet

Lesson 8.7 built Boreal Bikes Ltd.’s 2026 budgeted income statement: revenue 5,400,000, cost of goods sold 2,970,000, depreciation 200,000, net income 488,400. The board plans dividends of 150,000 and capital spending of 700,000, and wants cash held at a minimum of 150,000. Boreal’s 31 December 2025 balance sheet is the opening position:

Cash          250,000     Accounts payable      300,000
Receivables   600,000     Long-term debt        900,000
Inventory     450,000     Common shares       1,000,000
PP&E, net   2,100,000     Retained earnings   1,200,000
            3,400,000                         3,400,000

Every line of the budgeted balance sheet comes from a driver — a policy or a relationship the company has chosen — and lesson 9.5’s days ratios are the drivers for working capital. Round each line to the dollar.

Receivables at 45 days of sales: $45\times 5,400,000÷365=665,753$.

Inventory at 60 days of cost of goods sold: $60\times 2,970,000÷365=488,219$.

PP&E rolls forward: $2,100,000+700,000-200,000=2,600,000$.

Cash at the policy minimum: 150,000.

Total assets: $150,000+665,753+488,219+2,600,000=3,903,972$.

Payables at 40 days of cost of goods sold: $40\times 2,970,000÷365=325,479$.

Long-term debt and common shares are unchanged unless the plan says otherwise: 900,000 and 1,000,000.

Retained earnings roll forward: $1,200,000+488,400-150,000=1,538,400$. Opening plus net income less dividends — leaving out the dividends is the standard slip.

Liabilities and equity before new financing: $325,479+900,000+1,000,000+1,538,400=3,763,879$.

The plug

The two sides do not balance: assets 3,903,972, financing 3,763,879. The difference,

$$\text{External funds needed}=3,903,972-3,763,879=140,093,$$

is not an error to be hunted down. It is the answer: to grow receivables and inventory with sales, spend 700,000 on equipment, pay 150,000 of dividends and still hold 150,000 of cash, Boreal must raise 140,093 from outside — new borrowing, a share issue, or a smaller dividend. The balance sheet balances by definition once the financing decision is made; the plug is the size of that decision. (Lesson 10.7 confirms it: the budgeted cash-flow statement lands on exactly 150,000 of ending cash once the 140,093 is borrowed.)

Change a driver and the plug moves. If collections improved to 35 days, receivables would be $35\times 5,400,000÷365=517,808$, total assets 3,756,027, and the plug would be −7,852 — a small surplus rather than a need. Ten days of collections is worth about 148,000 of financing to Boreal.

Reading a ratio set as a whole

The module’s ratios are not read one at a time. Three tensions run through any set:

• Liquidity versus profitability. A current ratio of 4.0 is not “better” than 2.0 if it means cash idling in a chequing account and inventory nobody is buying; idle current assets earn nothing and drag asset turnover and ROA down.
• Leverage versus safety. Lesson 9.3’s multiplier lifts ROE; lesson 9.4’s covenants show the price.
• Growth versus financing. Boreal’s plug is what growth costs: every extra day of receivables and inventory is money the company must find.

The market ratios, for context

The market adds its own reading. Tamarack’s 100,000 shares closed 2025 at $52.80. Earnings per share (given at this level, not computed) are 480,000 ÷ 100,000 = $4.80, so the price-to-earnings ratio is 52.80 ÷ 4.80 = 11.0 — the market pays eleven years of current earnings for a share. Book value per share is 2,200,000 ÷ 100,000 = $22.00, so price-to-book is 52.80 ÷ 22.00 = 2.40 (Module 4 explained the gap). The 2025 dividend of 80,000 is $0.80 per share, a dividend yield of 0.80 ÷ 52.80 = 1.52 %. P/E uses earnings and price-to-book uses book value; the exam likes to swap them.