Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 04: Financial Forecasting
4-31
26. Complete cash budget (LO2) Archer Electronics Company's actual sales and purchases
for April and May are shown here along with forecasted sales and purchases for June
through September.
Sales
Purchases
April (actual) ...................................
$320,000
$130,000
May (actual) ....................................
300,000
120,000
June (forecast) .................................
275,000
120,000
July (forecast) ..................................
275,000
180,000
August (forecast) .............................
290,000
200,000
September (forecast) ........................
330,000
170,000
The company makes 10 percent of its sales for cash and 90 percent on credit. Of the
credit sales, 20 percent are collected in the month after the sale and 80 percent are collected
two months later. Archer pays for 40 percent of its purchases in the month after purchase
and 60 percent two months after.
Labor expense equals 10 percent of the current month's sales. Overhead expense equals
$12,000 per month. Interest payments of $30,000 are due in June and September. A cash
dividend of $50,000 is scheduled to be paid in June. Tax payments of $25,000 are due in
June and September. There is a scheduled capital outlay of $300,000 in September.
Archer Electronics's ending cash balance in May is $20,000. The minimum desired cash
balance is $10,000. Prepare a schedule of monthly cash receipts, monthly cash payments,
and a complete monthly cash budget with borrowing and repayments for June through
September. The maximum desired cash balance is $50,000. Excess cash (above $50,000) is
used to buy marketable securities. Marketable securities are sold before borrowing funds in
case of a cash shortfall (less than $10,000).
Chapter 04: Financial Forecasting
4-32
4-26. Solution:
Archer Electronics
Cash Receipts Schedule
April
May
June
July
Aug.
Sept.
Sales
$320,000
$300,000
$ 275,000
$275,000
$290,000
$330,000
+
Cash Sales (10%)
32,000
30,000
27,500
27,500
29,000
33,000
Credit Sales (90%)
288,000
270,000
247,500
247,500
261,000
297,000
+
Collections (month
after sale) 20%
57,600
54,000
49,500
49,500
52,200
+
Collections (second
month after sale)
80%
230,400
216,000
198,000
198,000
Total Cash Receipts
$311,900
$293,000
$276,500
$283,200
Chapter 04: Financial Forecasting
4-33
4-26. (Continued) Archer Electronics
Cash Payments Schedule
April
May
June
July
Aug.
Sept.
Purchases
$130,000
$120,000
$120,000
$180,000
$200,000
$170,000
Payments (month after
purchase—40%)
52,000
48,000
48,000
72,000
80,000
Payments (second month
after purchase—60%)
78,000
72,000
72,000
108,000
Labor Expense (10% of
sales)
27,500
27,500
29,000
33,000
Overhead
12,000
12,000
12,000
12,000
Interest Payments
30,000
30,000
Cash Dividend
50,000
Taxes
25,000
25,000
Capital Outlay
300,000
Total Cash Payments
$270,500
$159,500
$185,000
$588,000
Chapter 04: Financial Forecasting
4-34
4-26. (Continued)
Archer Electronics
Cash Budget
June
July
August
September
Cash Receipts .........................................
$311,900
$293,000
$276,500
$283,200
Cash Payments........................................
270,500
159,500
185,000
588,000
Net Cash Flow ........................................
41,400
133,500
91,500
(304,800)
Beginning Cash Balance .........................
20,000
50,000
50,000
50,000
Cumulative Cash Balance .......................
61,400
183,500
141,500
(254,800)
Monthly Borrowing or (Repayment) .....
--
--
--
*28,400
Cumulative Loan Balance .......................
--
--
--
28,400
Marketable Securities Purchased ............
11,400
133,500
91,500
--
(Sold)
--
--
(236,400)
Cumulative Marketable Securities ..........
11,400
144,900
236,400
--
Ending Cash Balance ..............................
50,000
50,000
50,000
10,000
*Cumulative Marketable Sec. (Aug) $236,400
Cumulative Cash Balance (Sept) –254,800
Required (ending) Cash Balance –10,000
Monthly Borrowing –$28,400
Chapter 04: Financial Forecasting
4-35
27. Percent-of-sales method (LO3) Owen's Electronics has 9 operating plants in seven
southwestern states. Sales for last year were $100 million, and the balance sheet at year-end
is similar in percentage of sales to that of previous years (and this will continue in the
future). All assets (including fixed assets) and current liabilities will vary directly with
sales. The firm is working at full capacity.
Balance Sheet
(in $ millions)
Assets
Liabilities and Stockholders' Equity
Cash ..........................................
$ 2
Accounts payable.......................
$15
Accounts receivable ..................
20
Accrued wages ..........................
2
Inventory...................................
23
Accrued taxes ............................
8
Current assets ..........................
$45
Current liabilities .....................
$25
Fixed assets ...............................
40
Notes payable ............................
10
Common stock ...........................
15
Retained earnings ......................
35
Total assets ...............................
$85
Total liabilities and
stockholders' equity .................
$85
Owen's has an after tax profit margin of 7 percent and a dividend payout ratio of 40
percent.
If sales grow by 10 percent next year, determine how many dollars of new funds are
needed to finance the growth.
Chapter 04: Financial Forecasting
4-36
4-27. Solution:
Owen’s Electronics
At Full Capacity
Spontaneous Assets = Current Assets Fixed Assets+
Spontaneous Liabilities = Acc. Pay. + Accrued Wages & Taxes
( ) ( ) ( )
2
AL
Required New Funds = S S PS 1 D
SS
− − −
( )( )
S = 10% $100mil.
S = $10,000,000
( ) ( )
( )( )
85 25
RNF (millions)= $10,000,000 $10,000,000 .07
100 100
$110,000,000 1 .40
−−
−
( ) ( ) ( )( )
.85 $10,000,000 .25 $10,000,000 .07 $110,000,000 .60= − −
$8,500,000 $2,500,000 $4,620,000=−−
RNF=$1,380,000
Chapter 04: Financial Forecasting
4-37
28. Percent-of-sales method (LO3) The Manning Company has financial statements as shown
below, which are representative of the company's historical average.
The firm is expecting a 20 percent increase in sales next year, and management is
concerned about the company's need for external funds. The increase in sales is expected to
be carried out without any expansion of fixed assets, but rather through more efficient asset
utilization in the existing store. Among liabilities, only current liabilities vary directly with
sales.
Using the percent-of-sales method, determine whether the company has external
financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be
found from the income statement.)
Income Statement
Sales ..........................................................
$200,000
Expenses ....................................................
158,000
Earnings before interest and taxes ..............
$ 42,000
Interest .......................................................
7,000
Earnings before taxes .................................
$ 35,000
Taxes .........................................................
15,000
Earnings after taxes ....................................
$ 20,000
Dividends ...................................................
$ 6,000
Balance Sheet
Assets
Liabilities and Stockholders' Equity
Cash ............................................
$ 5,000
Accounts payable ........................
$ 25,000
Accounts receivable ....................
40,000
Accrued wages ............................
1,000
Inventory.....................................
75,000
Accrued taxes ..............................
2,000
Current assets ............................
$120,000
Current liabilities .......................
$ 28,000
Fixed assets .................................
80,000
Notes payable ..............................
7,000
Long-term debt ............................
15,000
Common stock ............................
120,000
Retained earnings ........................
30,000
Total assets .................................
$200,000
Total liabilities and
stockholders' equity ...................
$200,000
Chapter 04: Financial Forecasting
4-38
4-28. Solution:
Manning Company
Earnings after taxes $20,000
Profit margin= 10%
Sales $200,000
Dividends $6,000
Payout ratio = 30%
Earnings 20,000
==
==
Change in Sales 20% $200,000 $40,000= =
SpontaneousAssets Cash Acc. Rec. Inventory= + +
Spontaneous Liabilities Acc. Payable Accrued Wages & Taxes=+
( ) ( ) ( )
( ) ( ) ( )( )
( ) ( ) ( )( )
AL
RNF= ΔS ΔS PS 1 D
2
SS
$120,000 $28,000
= $40,000 $40,000 .10 $240,000 1 .30
$200,000 $200,000
=.60 $40,000 .14 $40,000 .10 $240,000 .70
=$24,000 $5,600 $16,800
RNF = $1,600
− − −
− − −
−−
−−
The firm needs $1,600 in external funds.
Chapter 04: Financial Forecasting
4-39
29. Percent-of-sales method (LO3) Conn Man's Shops, Inc., a national clothing chain, had
sales of $300 million last year. The business has a steady net profit margin of 8 percent and
a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown
below.
Balance Sheet
End of Year
(in $ millions)
Assets
Liabilities and Stockholders' Equity
Cash ..............................................
$ 20
Accounts payable ........................
$ 70
Accounts receivable ......................
25
Accrued expenses ........................
20
Inventory.......................................
75
Other payables ............................
30
Plant and equipment ......................
120
Common stock ............................
40
Retained earnings ........................
80
Total assets ...................................
$240
Total liabilities and
Stockholders’ equity..................
$240
The firm's marketing staff has told the president that in coming year there will be a large
increase in the demand for overcoats and wool slacks. A sales increase of 15 percent is
forecast for the company.
All balance sheet items are expected to maintain the same percent-of-sales relationships
as last year, except for common stock and retained earnings. No change is scheduled in the
number of common stock shares outstanding, and retained earnings will change as dictated
by the profits and dividend policy of the firm. (Remember the net profit margin is 8
percent.)
a. Will external financing be required for the company during the coming year?
b. What would be the need for external financing if the net profit margin went up to 9.5
percent and the dividend payout ratio was increased to 50 percent? Explain.
This included fixed assets as the firm is at full capacity.
Chapter 04: Financial Forecasting
4-40
4-29. Solution:
Conn Man’s Shops, Inc.
a.
( ) ( ) ( )
2
AL
Required New Funds = S S PS 1 D
SS
− − −
S = 15% $300,000,000 = $45,000,000
( ) ( )
( )( )
( ) ( )
( )( )
240 120
RNF $45,000,000 $45,000,000 .08
300 300
$345,000,000 1 .25
.80 $45,000,000 .40 $45,000,000 .08
$345,000,000 .75
$36,000,000 $18,000,000 $20,700,000
= − −
−
= − −
= − −
( )
RNF = $2,700,000
A negative figure for required new funds indicates that an
excess of funds ($2.7 mil.) is available for new investment.
No external funds are needed.
b.
( )
RNF $36,000,000 $18,000,000 .095($345,000,000)
1 .5
$36,000,000 $18,000,000 $16,387,500
=−
−
−
= − −
= $1,612,500 external funds required
The net profit margin increased slightly, from 8% to 9.5%,
which decreases the need for external funding. The dividend
payout ratio increased tremendously, however, from 25% to
50%, necessitating more external financing. The effect of the
dividend policy change overpowered the effect of the net
profit margin change.
