61) Amalgamated Enterprises is planning to purchase some new equipment. With this new
equipment, the company expects sales to increase from $8,000,000 to $10,000,000. A portion of
the financing for the purchase of the equipment will come from a $1,000,000 new common stock
issue. The company knows that current assets, fixed assets, accounts payable, and accrued
8%, and the company plans to pay 40% of its after-tax earnings in dividends. A copy of the
company’s current balance sheet is given below:
Amalgamated Enterprises Balance Sheet
Current assets $3,000,000
Fixed assets 12,000,000
Total assets $15,000,000
Accounts payable $4,000,000
Accrued expenses 1,000,000
Long-term debt 3,000,000
Common stock 2,000,000
Retained earnings 5,000,000
Total liabilities and net worth $15,000,000
Prepare a pro forma balance sheet for Amalgamated for next year using the percent-of-sales
method and the information provided above.
21
Notes
a. Not applicable. These accounts are assumed not to vary directly with sales.
b. The company issued $1 million in new common stock.
c. The increase in retained earnings is equal to net profit minus dividends paid. Increase in
Topic: 17.2 Developing a Long-Term Financial Plan
Keywords: discretionary financing needs (DFN)
Principles: Principle 3: Cash Flows Are the Source of Value
22
1) Which of the following is NOT a basic function of a budget?
A) Budgets indicate the need for future short-term financing.
B) Budgets provide the basis for corrective action when actual figures differ from the budgeted
figures.
C) Budgets compare historical costs of the firm with its current cost performance.
D) Budgets allow for performance evaluation.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
2) Which of the following will increase cumulative borrowing in the cash budget?
A) Slower collections from customers
B) Slower payments to suppliers
C) Higher interest rates
D) Faster collection of receivables
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
3) All of the following are found in the cash budget EXCEPT:
A) a net change in cash for the period.
B) inventory.
C) cash disbursements.
D) new financing needed.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
4) Purchases of plant and equipment can be determined from the:
A) current cash budget.
B) previous period’s balance sheet.
C) pro forma income statement.
D) use of ratio analysis.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
23
5) Which of the following is always a non-cash expense?
A) Income taxes
B) Salaries
C) Depreciation
D) None of the above
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
6) A company collects 60% of its sales during the month of the sale, 30% one month after the
sale, and 10% two months after the sale. The company expects sales of $10,000 in August,
$20,000 in September, $30,000 in October, and $40,000 in November. How much money is
expected to be collected in October?
A) $25,000
B) $15,000
C) $35,000
D) None of the above
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
7) The function of a budget includes to:
A) indicate the amount and time of future financing needs.
B) provide a basis for corrective action.
C) provide information for performance evaluations.
D) all of the above.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
24
Table 1
Dorian Industries’ projected sales for the first six months of 2004 are given below:
Jan. $200,000 April $400,000
Feb. $240,000 May $320,000
2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must
have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to
8) Based on the information in Table 1, what are Dorian Industries’ total cash receipts
(collections) for April 2004?
A) $400,000
B) $300,000
C) $100,000
D) ($60,000)
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
9) Based on the information in Table 1, what is Dorian Industries’ total disbursement in May (not
including interest on short-term borrowing)?
A) $300,000
B) $240,000
C) $25,900
D) ($60,000)
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
25
10) Based on the information in Table 1, what is Dorian Industries’ ending cash balance (before
borrowing) in March?
A) $10,000
B) $25,000
C) $20,000
D) ($30,000)
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
11) Based on the information in Table 1, what is Dorian’s projected cumulative short-term
borrowing as of April 30, 2004?
A) $15,000
B) $60,000
C) $35,150
D) None of the above
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
12) Based on the information in Table 1, what is Dorian’s projected EBIT for March 2004?
A) ($10,000)
B) ($30,000)
C) $70,000
D) None of the above
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
26
Table 2
Fielding Wilderness Outfitters had projected its sales for the first six months of 2004 to be as
follows:
Jan. $50,000 April $180,000
Feb. $60,000 May $240,000
March $100,000 June $240,000
13) Based on the information contained in Table 2, what are Fielding’s projected total receipts
(collections) for April?
A) $124,000
B) $180,000
C) ($4,000)
D) $36,000
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
14) Based on the information in Table 2, what was Fielding’s projected loss for March?
A) $184,000
B) $110,000
C) $84,000
D) None of the above
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
27
2004?
A) $110,000
B) $15,000
C) $70,000
D) $85,000
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
16) Miller Metalworks had sales in November of $60,000, in December of $40,000, and in
January of $80,000. Miller collects 40% of sales in the month of the sale and 60% one month
after the sale. Calculate Miller’s cash receipts for January.
A) $44,000
B) $56,000
C) $64,000
D) $72,000
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
28
Table 3
Thompson Manufacturing Supplies’ projected sales for the first six months of 2004 are given
below.
Jan. $250,000 April $400,000
Feb. $300,000 May $450,000
17) Based on the information in Table 3, what are Thompson’s projected total receipts
(collections) for March?
A) $400,000
B) $310,000
C) ($20,000)
D) $320,000
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
18) Based on the information in Table 3, what is Thompson’s projected cumulative borrowing as
of March 1, 2004?
A) $85,000
B) $45,000
C) $70,000
D) – 0 –
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
29