Chapter 3
2. Historical analysis helps decide for which financial statement items a percent-of-sales forecast
4. a. If the collection period is 60 days, May cash receipts from March sales will equal half of
March sales or $200,000. In addition the company will receive cash from half of May
b. With a 45-day collection period, cash collected on May 1 is from credit sales made in mid-
March, and collections on May 31 are from credit sales made in mid-April. Therefore,
6. New equity equation: = C37 + D28. New net sales equation: = C19 + C19*D4.
8. Westmark Cash Budget for First Three Months of 2015
January
February
March
Cash receipts:
Sales for cash
$120,000
$48,000
$48,000
Collections from credit sales
960,000
480,000
192,000
Total cash receipts
1,080,000
528,000
240,000
Cash disbursements:
Payment for purchases
540,000
1,200,000
300,000
Wages
180,000
180,000
180,000
Interest payments
0
0
90,000
Principal payments
0
0
210,000
Dividends
0
0
300,000
Tax payments
0
180,000
0
Total cash disbursements
720,000
1,560,000
1,080,000
Net cash receipts
(disbursements)
360,000
-1,032,000
-840,000
Determination of cash needs:
Beginning cash
300,000
660,000
-372,000
Net receipts (disbursements)
360,000
-1,032,000
-840,000
Ending cash
660,000
-372,000
-1,212,000
Minimum cash desired
150,000
150,000
150,000
Cash surplus (deficit)
$510,000
($522,000)
($1,362,000)
10.
Westmark Industrial, Inc.
Cash Flow Forecast
1st Quarter 2015
($ thousands)
Sources of cash
Cash from operations:
Profit after tax
($80)
Depreciation
30
Increase in liabilities or reduction in assets:
Bank loan
1,362
Cash
150
Accounts receivable
768
Inventory
0
Total sources
$2,230
Uses of cash:
Dividends
$300
Decreases in liabilities or increases in assets:
Accounts payable
1,500
Current portion long-term debt
210
Taxes payable
220
Total uses
$2,230
12. a.
Toys-4-Kids
2015 Quarterly Pro Forma Forecast
Assuming Level Production
($000 thousands)
Qtr 1
Qtr 2
Qtr 3
Qtr 4
$300
$375
$3,200
$5,000
195
244
2,080
3,250
105
131
1,120
1,750
560
560
560
560
(455)
(429)
560
1,190
(182)
(172)
224
476
(273)
(257)
336
714
$200
$200
$200
$200
225
281
2,400
3,750
1,747
2,946
2,308
500
2,172
3,427
4,908
4,450
1,000
1,000
1,000
1,000
$3,172
$4,427
$5,908
$5,450
$222
$222
$222
$222
(182)
(172)
224
476
40
50
446
698
400
400
400
400
2,727
2,470
2,806
3,520
$3,167
$2,920
$3,652
$4,618
$5
$1,507
$2,256
$832
b. Profits more than double, from $253,000 to $520,000. (Remember, this ignores the
increase in interest expense due to increased borrowing.)
c. Level production causes ending inventory to rise from $500,000 each quarter to a high of
d. The company may be able to borrow the needed money, but the decision is not obvious.
The maximum loan need of $2.3 million occurs in quarter 3. Possible collateral at that
time includes $2.4 million in accounts receivable and $2.3 million in inventory. The
borrowing needs are much larger, and the company incurs serious obsolescence risks. The
choice is not an easy one.
A possible intermediate strategy is to move to quasi-level production, producing stable
items for inventory early in the year and fad items for immediate sale later. This enables
14. See Excel solutions at mhhe.com/higgins11e.