Chapter 04: Financial Forecasting
4-21
21. Schedule of cash payments (LO2) The Denver Corporation has forecast the following
sales for the first seven months of the year:
January……… ……. $10,000 May……… $10,000
February……… ….. 12,000 June……… 16,000
March……… ……… 14,000 July…….. 18,000
April……… ……….. 20,000
Monthly material purchases are set equal to 30 percent of forecasted sales for the next
month. Of the total material costs, 40 percent are paid in the month of purchase and 60
percent in the following month. Labor costs will run $4,000 per month, and fixed overhead
is $2,000 per month. Interest payments on the debt will be $3,000 for both March and June.
Finally, the Denever salesforce will receive a 1.5 percent commission on total sales for the
first six months of the year, to be paid on June 30.
Prepare a monthly summary of cash payments for the six-month period from January
through June. (Note: Compute prior December purchases to help get total material
payments for January.)
Chapter 04: Financial Forecasting
4-22
4-21. Solution:
Denver Corporation
Cash Payments Schedule
Dec.
Jan.
Feb.
March
April
June
July
Sales
$10,000
$12,000
$14,000
$20,000
$16,000
$18,000
Purchases (30% of
next month’s sales)
3,000
3,600
4,200
6,000
3,000
5,400
Payment (40% of
current purchases)
1,440
1,680
2,400
1,200
2,160
Material payment
(60% of previous
month’s purchases)
1,800
2,160
2,520
3,600
2,880
Total payment for
materials
3,240
3,840
4,920
4,800
5,040
Labor costs
4,000
4,000
4000
4,000
4,000
Fixed overhead
2,000
2,000
2,000
2,000
2,000
Interest payments
3,000
3,000
Sales commission
(1.5% of $82,000)
1,230
Total payments
$ 9,240
$ 9,840
$13,920
$10,800
$15,270
Chapter 04: Financial Forecasting
4-23
22. Schedule of cash payments (LO2) The Boswell Corporation forecasts its sales in units for
the next four months as follows:
March……….. ……. 6,000
April………… ……. 8,000
May…………. ……. 5,500
June…………. ……. 4,000
Boswell maintains an ending inventory for each month in the amount of one and one-half
times the expected sales in the following month. The ending inventory for February
(March’s beginning inventory) reflects this policy. Materials cost $5 per unit and are paid
for in the month after production. Labor cost is $10 per unit and is paid for in the month
incurred. Fixed overhead is $12,000 per month. Dividends of $20,000 are to be paid in
May. Five thousand units were produced in February.
Complete a production schedule and a summary of cash payments for March, April,
and May. Remember that production in any one month is equal to sales plus desired ending
inventory minus beginning inventory.
4-22. Solution:
Boswell Corporation
Production Schedule
March
April
May
June
Forecasted unit sales
6,000
8,000
5,500
4,000
+Desired ending
inventory
12,000
8,250
6,000
–Beginning inventory
9,000
12,000
8,250
Units to be produced
9,000
4,250
3,250
Cash Payments
Feb
March
April
May
Units produced
5,000
9,000
4,250
3,250
Materials ($5/unit)
month after production
$25,000
$45,000
$21,250
Labor ($10/unit)
month of production
90,000
42,500
32,500
Fixed overhead
12,000
12,000
12,000
Dividends
20,000
Total Cash Payments
$127,000
$99,500
$85,750
Chapter 04: Financial Forecasting
4-24
23. Schedule of cash payments (LO2) The Volt Battery Company has forecast its sales in
units as follows:
January……… ……. 800 May……… 1,350
February……… ….. 650 June……… 1,500
March……… ……… 600 July……… 1,200
April……… ……….. 1,100
Volt Battery always keeps an ending inventory equal to 120 percent of the next month’s
expected sales. The ending inventory for December (January’s beginning inventory) is 960
units, which is consistent with this policy.
Materials cost $12 per unit and are paid for in the month after purchase. Labor cost is $5
per unit and is paid in the month the cost is incurred. Overhead costs are $6,000 per month.
Interest of $8,000 is scheduled to be paid in March, and employee bonuses of $13,200 will
be paid in June.
Prepare a monthly production schedule and a monthly summary of cash payments for
January through June. Volt produced 600 units in December.
Chapter 04: Financial Forecasting
4-25
4-23. Solution:
Volt Battery Company
Production Schedule
Jan.
Feb.
March
April
May
June
July
Forecasted unit sales
800
650
600
1,100
1,350
1,500
1,200
+ Desired ending inventory
780
720
1,320
1,620
1,800
1,440
– Beginning inventory
960
780
720
1,320
1,620
1,800
= Units to be produced
620
590
1,200
1,400
1,530
1,140
Summary of Cash Payments
Dec.
Jan.
Feb.
March
April
May
June
Units produced
600
620
590
1,200
1,400
1,530
1,140
Material cost ($12/unit)
month after purchase
$ 7,200
$ 7,440
$ 7,080
$14,400
$16,800
$18,360
Labor cost ($5/unit) month
incurred
3,100
2,950
6,000
7,000
7,650
$ 5,700
Overhead cost
6,000
6,000
6,000
6,000
6,000
6,000
Interest
8,000
Employee bonuses
13,200
Total Cash Payments
$16,300
$16,390
$27,080
$27,400
$30,450
$43,260
Chapter 04: Financial Forecasting
4-26
24. Cash Budget (LO2) Lansing Auto Parts, Inc., has projected sales of $25,000 in October,
$35,000 in November, and $30,000 in December. Of the company’s sales, 20 percent are
paid for by cash and 80 percent are sold on credit. The credit sales are collected one month
after sale. Determine collections for November and December.
Also assume that the company’s cash payments for November and December are
$30,400 and $29,800, respectively. The beginning cash balance in November is $6,000,
which is the desired minimum balance.
Prepare a cash budget with borrowing needed or repayments for November and
December. (You will need to prepare a cash receipts schedule first.)
4-24. Solution:
Lansing Auto Parts, Inc.
Cash Receipts Schedule
October
November
December
Sales
$25,000
$35,000
$30,000
Cash sales (20%)
7,000
6,000
Collections (80% of
previous month’s
sales)
20,000
28,000
Total cash receipts
$27,000
$34,000
Lansing Auto Parts, Inc.
Cash Budget
November
July
Cash Receipts
$27,000
$34,000
Cash Payments
30,400
29,800
Net Cash Flow
(3,400)
4,200
Beginning Cash Balance
6,000
6,000
Cumulative Cash Balance
2,600
10,200
Monthly Loan or (Repayment)
3,400
(3,400)
Cumulative Loan Balance
3,400
-0-
Ending Cash Balance
$ 6,000
$ 6,800
Chapter 04: Financial Forecasting
4-27
25. Complete cash budget (LO2) Harry’s Carryout Stores has eight locations. The firm wishes
to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will
finance construction if the firm can present an acceptable three-month financial plan for
January through March. The following are actual and forecasted sales figures:
Actual Forecast Additional Information
November ……….. $200,000 January ………. $280,000 April forecast ….. $330,000
December ……….. 220,000 February …….. 320,000
March……… . 340,000
Of the firm’s sales, 40 percent are for cash and the remaining 60 percent are on credit. Of
credit sales, 30 percent are paid in the month after sale and 70 percent are paid in the
second month after the sale. Materials cost 30 percent of sales and are purchased and
received each month in an amount sufficient to cover the following month’s expected sales.
Materials are paid for in the month after they are received. Labor expense is 40 percent of
sales and is paid for in the month of sales. Selling and administrative expense is 5 percent
of sales and is also paid in the month of sales. Overhead expense is $28,000 in cash per
month.
Depreciation expense is $10,000 per month. Taxes of $8,000 will be paid in January,
and dividends of $2,000 will be paid in March. Cash at the beginning of January is
$80,000, and the minimum desired cash balance is $75,000.
For January, February, and March, prepare a schedule of monthly cash receipts, monthly
cash payments, and a complete monthly cash budget with borrowings and repayments.
Chapter 04: Financial Forecasting
4-25. Solution:
Harry’s Carry-Out Stores
Cash Receipts Schedule
November
December
January
February
March
April
Sales
$200,000
$220,000
$ 280,000
$320,000
$340,000
$330,000
Cash sales (40%)
80,000
88,000
112,000
128,000
136,000
132,000
Credit sales (60%)
120,000
132,000
168,000
192,000
204,000
198,000
Collections (month
after credit sales)
30%
36,000
39,600
50,400
57,600
61,200
Collections (two
months after credit
sales) 70%
84,000
92,400
117,600
134,400
Total Cash
Receipts
$235,600
$270,800
$311,200
Chapter 04: Financial Forecasting
4-29
4-25. (Continued) Harry’s Carry-Out Stores
Cash Payments Schedule
January
February
March
Payments for Purchases (30% of next month’s
sales paid in month after purchases—equivalent
to 30% of current sales) …………………………………
$ 84,000
$ 96,000
$102,000
Labor Expense (40% of sales) ………………………..
112,000
128,000
136,000
Selling and Admin. Exp. (5% of sales) …………….
14,000
16,000
17,000
Overhead …………………………………………………….
28,000
28,000
28,000
Taxes ………………………………………………………….
8,000
Dividends ……………………………………………………
2,000
Total Cash Payments* …………………………..………
$246,600
$268,000
$285,000
Chapter 04: Financial Forecasting
4-30
4-25. (Continued)
Harry’s Carry-Out Stores
Cash Budget
January
February
March
Total Cash Receipts ……………………….
$235,600
$270,800
$311,200
Total Cash Payments ……………………..
246,000
268,000
285,000
Net Cash Flow ………………………………
(10,400)
2,800
26,200
Beginning Cash Balance …………………
80,000
75,000
75,000
Cumulative Cash Balance ……………….
69,600
77,800
101,200
Monthly Loan or (repayment) ………….
5,400
(2,800)
(2,600)
Cumulative Loan Balance ……………….
5,400
2,600
-0-
Ending Cash Balance ……………………..
$ 75,000
$ 75,000
$ 98,600