42) Which of the following would not be found in a cash budget?
A) interest expense
B) taxes
C) depreciation
D) cash sales
43) Is it possible for the cash budget and the pro forma income statement to have different
results?
A) Yes, because revenues and expenses included in each statement are different.
B) Yes, because revenues and expenses are accounted for over different time periods.
C) No, because they contain the same variables, while just using different formats.
D) No, because the cash budget and the pro forma income statement provide forecasts for the
same time period.
44) The cash budget consists of all the following factors except:
A) cash receipts.
B) cash disbursements.
C) new financing needed.
D) net income.
45) What is the primary tool for short-term financial forecasting?
A) Pro forma income statement
B) Pro forma balance sheet
C) Pro forma cash budget
D) Capital Budgeting
46) Which of the following items does not belong in a cash budget?
A) Rent
B) Taxes
C) Depreciation
D) Wages and salaries
47) In what way does a cash budget provide management with better information about financing
requirements than a pro forma balance sheet?
A) A pro forma cash budget gives greater details about the depreciation of fixed assets.
B) A pro forma cash budget not only delineates the financing that is needed but it also pinpoints
in greater detail when the financing is needed.
C) A pro forma cash budget utilizes superior methods in determining a firm’s income tax liability
for the planned period.
D) A pro forma cash budget does not offer better information to management regarding
financing than a pro forma balance sheet.
48) The balance sheet of the Emery Company is presented below:
Emery Company Balance Sheet
March 31, 2010
(Millions of Dollars)
Current assets
$18
Accounts
payable
$9
Fixed assets
38
Notes payable
0
Total
$56
Long-term debt
15
Common equity
32
Total
$56
For the year ending March 31, 2010, Jackson had sales of $58 million. The common
stockholders receive all net earnings of the firm in the form of cash dividends, leaving no funds
from earnings available to the firm for expansion (assume that depreciation expense is just equal
to the cost of replacing worn-out assets).
Construct a pro forma balance sheet for March 31, 2011 for an expected level of sales of $75.4
million. Assume current assets and accounts payable vary as a percent of sales, and fixed assets
remain at the present level. Use notes payable as discretionary financing.
Current assets
Accounts
payable
Fixed assets
Notes payable
Total
$61.4
Long-term debt
15.0
Common equity
32.0
Total
$61.4
37
49) The cash budget for Parker Processed Meats, Inc. is given below for the fourth quarter of
2010:
Parker Processed Meats, Inc.
Cash Budget for the Three Months Ending December 31, 2010
Cash receipts
Nov.
Total collections
$48,075
Cash
disbursements:
Purchases
$50,800
Wages and salaries
$8,500
Other expenses
$2,350
Taxes
Total
disbursements
$57,375
The expected sales for the period are as follows:
Oct.: $116,000 Nov.: $127,000 Dec.: $95,000
The total depreciation expense for the period will be $12,000.
An interest payment on outstanding debt of $13,000 will be made in December. Using the
information given above, construct a pro forma income statement for the final quarter of 2010.
50) The balance sheet for the Long Drive Golf Company on September 30, 2010 is presented
Sales
Less: Cost of goods
sold
Gross profits
$187,170
Less:
Depreciation expense
Wages and salaries
$25,500
Other expenses
$7,350
Net operating income
Less: interest expense
$13,000
Earnings before taxes
$129,320
Less: Income taxes
$16,350
Net income
$112,970
38
below:
Long Drive Golf Company Balance Sheet
September 30, 2010
Cash
$528,000
Accounts payable
$1,568,000
Accounts
receivable
1,216,000
Notes payable
752,000
Inventory
2,400,000
Total current
liabilities
2,320,000
Fixed assets
5,632,000
Long-term debt
2,336,000
Common stock
3,200,000
Total assets
$9,776,000
Retained earnings
1,920,000
Total liabilities and
stockholders equity
$9,776,000
The treasurer of the firm wants to issue $1,200,000 in long-term bonds to be used as follows:
1. $240,000 to reduce accounts payable
2. $192,000 to retire notes payable
3. $128,000 to increase cash on hand
4. $640,000 to increase inventories
a. Assuming that the loan is obtained, construct a pro forma balance sheet for December 31,
2010, for Long Drive Golf Company that reflects the use of the funds provided.
b. Was the liquidity of Long Drive Golf Company improved by the loan?
40
51) The treasurer for Chic Man Clothing must decide how much money the company needs to
borrow in July. The balance sheet for June 30, 2010 is presented below:
Chic Man Clothing Balance Sheet
June 30, 2010
Cash
$87,000
Accounts payable
$550,000
Marketable
securities
123,000
Long-term debt
350,000
Accounts
receivable
360,000
Common stock
130,000
Inventory
300,000
Retained earnings
270,000
Total current assets
870,000
Total liabilites and
stockholders
equity
1,300,000
Fixed assets
430,000
Total assets
$1,300,000
The company expects sales of $400,000 for July. The company has observed that 25% of its
sales is for cash and that the remaining 75% is collected in the following month. The company
plans to purchase $345,000 of new clothing. Usually 70% of purchases is for cash and the
remaining 30% of purchases is paid in the following month. Salaries are $135,000 per month,
lease payments are $35,000 per month, and depreciation charges are $20,000 per month. The
company plans to purchase a new van for $60,000 in July and sell its marketable securities for
$123,000. If the company must maintain a minimum cash balance of $25,000, how much money
must the company borrow in July?
52) The ZYX Corporation is planning to request a line of credit from its bank and wants to
estimate its cash needs for the month of September. The following sales forecasts have been
made for 2010:
July $500,000
August 400,000
September 300,000
October 200,000
November 100,000
Collection estimates were obtained from the credit collection department as follows: 20%
collected within the month of sale; 70% collected the first month following this sale; and 10%
collected the second month following the sale. Payments for labor and raw materials are
typically made in the month in which these costs are incurred. Total labor and raw material costs
each month are 50% of sales. General administrative expenses are $30,000 per month, lease
payments are $10,000 per month, and depreciation charges are $20,000 per month. The
corporation tax rate is 40%; however, no corporate taxes are paid in September. Prepare a pro
forma income statement and cash budget for September.
53) 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 its current assets, fixed assets, accounts payable, and accrued
expenses increase directly with sales. The company’s net profit margin on sales is 8 percent, and
the company plans to pay 40 percent 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.
Present Level (Mil)
Percent of Sales
Projected Based on
Sales of $10 Mil
Current assets
0.375
$3.75
Fixed assets
1.500
15.00
Total assets
$15
$18.75
Accounts payable
0.50
$5.00
Accrued expenses
1
0.125
1.25
Long-term debt
3
4.02d
Common stock
2
3.00b
Retained earnings
5
5.48c
Total liabilities and net
worth
$15
$18.75
54) CBD Computer Inc. is attempting to estimate its needs for funds during each of the months
covering the third quarter of 20XX. Pertinent information is given below:
a. Past and estimated future sales for 20XX:
April $80,000 July $ 90,000
May 95,000 August 130,000
June 70,000 September 110,000
October 140,000
b. Rent expense is $2,500 per month.
c. A quarterly interest payment on $100,000 in 7% notes payable is to be paid during
September, 20XX.
d. Wages and salaries are estimated as follows:
July $ 8,000
August 10,000
September 12,000
Payments are made within the month in which the wages are earned.
e. Sixty percent of sales are for cash, with the remaining 40% collected in the month following
the sale.
f. CBD pays 80% of the sales price for merchandise and makes payment in the same month in
which the sales occur, although purchases are made in the month prior to the anticipated sales.
g. CBD plans to pay $7,500 in cash for a new forklift truck in July.
h. Short-term loans can be obtained at the end of each month at 13% annual interest with
interest paid during each month for which the loan is outstanding.
i. CBD’s ending cash balance for June 30, 200X is $67,000:
the minimum balance the firm wishes to have in any month is $35,000.
Required: Set up a cash budget for CBD for the quarter ended September 30, 20XX.