P4-11. Cash budget—advanced
LG 4; Challenge
a.
Xenocore, Inc.
($000)
Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr.
Forecast Sales $210 $25
0
$170 $160 $140 $180 $200 $250
Cash sales (0.20) $ 34 $ 32 $ 28 $ 36 $ 40 $ 50
0
Cash purchases $ 14 $ 10 $ 8 $ 11 $ 10 $ 9
b. Required total financing
c. The line of credit should be at least $37,000 to cover the maximum borrowing needs for the month of
April.
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Chapter 4 Cash Flow and Financial Planning 52
P4-12. Cash flow concepts
LG 4; Basic
Note to instructor: There are a variety of possible answers to this problem, depending on the assumptions
the student might make. The purpose of this question is to have a chance to discuss the difference between
cash flows, income, and assets.
Transaction Cash Budget
Pro Forma
Income Statement
Pro Forma
Balance Sheet
Cash sale X X X
P4-13. Cash budget—scenario analysis
LG 4; Intermediate
a.
Trotter Enterprises, Inc.
Multiple Cash Budgets ($000)
October November December
Pessi-
mistic
Most
Likely
Opti-
mistic
Pessi-
mistic
Most
Likely
Opti-
mistic
Pessi-
mistic
Most
Likely
Optimistic
Total cash
receipts $260 $342 $462 $200 $287 $366 $191 $294 $353
balance
b. Under the pessimistic scenario Trotter will definitely have to borrow funds, up to $162,000 in
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Chapter 4 Cash Flow and Financial Planning 53
P4-14. Multiple cash budgets—scenario analysis
LG 4; Intermediate
(a) and (b)
Brownstein, Inc.
Multiple Cash Budgets
($000)
1st Month 2nd Month 3rd Month
Pessi-
mistic
Most
Likely
Opti-
mistic
Pessi-
mistic
Most
Likely
Opti-
mistic
Pessi-
mistic
Most
Likely
Opti-
mistic
Sales $ 80 $100 $120 $ 80 $100 $120 $80 $100 $120
c. Considering the extreme values reflected in the pessimistic and optimistic outcomes allows
P4-15. Pro forma income statement
LG 5; Intermediate
a.
Pro Forma Income Statement
Metroline Manufacturing, Inc.
for the Year Ended December 31, 2016
(percent-of-sales method)
Sales $1,500,000
Less: Cost of goods sold (0.65 sales) 975,000
b.
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Chapter 4 Cash Flow and Financial Planning 54
Pro Forma Income Statement
Metroline Manufacturing, Inc.
for the Year Ended December 31, 2016
(based on fixed and variable cost data)
Sales $1,500,000
Less: Cost of goods sold
Less: Operating expense:
c. The pro forma income statement developed using the fixed and variable cost data projects a higher net
P4-16. Pro forma income statement—scenario analysis
LG 5; Challenge
a.
Pro Forma Income Statement
Allen Products, Inc.
for the Year Ended December 31, 2016
Pessimistic Most Likely Optimistic
Sales $900,000 $1,125,000 $1,280,000
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Chapter 4 Cash Flow and Financial Planning 55
b. The simple percent-of-sales method assumes that all costs are variable. In reality, some of the
c.
Pro Forma Income Statement
Allen Products, Inc.
for the Year Ended December 31, 2016
Pessimistic Most Likely Optimistic
Sales $900,000 $1,125,000 $1,280,000
Less cost of goods sold:
P4-17. Pro forma balance sheet—basic
LG 5; Intermediate
a.
Pro Forma Balance Sheet
Leonard Industries
December 31, 2016
Assets
Current assets
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Chapter 4 Cash Flow and Financial Planning 56
Pro Forma Balance Sheet
Leonard Industries
December 31, 2016
Liabilities and stockholders’ equity
Current liabilities
1Beginning gross fixed assets $ 600,000
2Beginning retained earnings (Jan. 1, 2016) $ 220,000
3Total assets $1,383,000
b. Based on the forecast and desired level of certain accounts, the finance manager should arrange for
credit of $53,000. Of course, if financing cannot be obtained, one or more of the constraints may be
changed.
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Chapter 4 Cash Flow and Financial Planning 57
c. If Leonard Industries reduced its 2016 dividend to $17,000 or less, the firm would not need any
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Chapter 4 Cash Flow and Financial Planning 58
P4-18. Pro forma balance sheet
LG 5; Intermediate
a.
Pro Forma Balance Sheet
Peabody & Peabody
December 31, 2017
Assets
Current assets
Liabilities and stockholders’ equity
Current liabilities
1Beginning net fixed assets (January 1, 2016) $4,000,000
2Note: Common equity is the sum of common stock and retained earnings.
b. Peabody & Peabody must arrange for additional financing of at least $775,000 over the next two years
based on the given constraints and projections.
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P4-19. Integrative—pro forma statements
LG 5; Challenge
a.
Pro Forma Income Statement
Red Queen Restaurants
for the Year Ended December 31, 2016
(percent-of-sales method)
Sales $900,000
b.
Pro Forma Balance Sheet
Red Queen Restaurants
December 31, 2016
(Judgmental Method)
Assets Liabilities and Equity
Cash $ 30,000 Accounts payable $112,500
c. Using the judgmental approach, the external funds requirement is $11,250.
P4-20. Integrative—pro forma statements
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Chapter 4 Cash Flow and Financial Planning 60
LG 5; Challenge
a.
Pro Forma Income Statement
Provincial Imports, Inc.
for the Year Ended December 31, 2016
(Based on fixed and variable cost data)
Sales $6,000,000
Less: Cost of goods sold (0.35 sales $1,000,000) 3,100,000
b.
Pro Forma Balance Sheet
Provincial Imports, Inc.
December 31, 2016
(Judgmental Method)
Assets Liabilities and Equity
Cash $ 400,000 Accounts payable $ 840,000
1Taxes payable for 2015 are nearly 20% of the 2015 taxes on the income statement. The pro forma
2Net fixed assets (January 1, 2016) $1,400,000
3Beginning retained earnings (January 1, 2016) $1,375,000
c. Using the judgmental approach, the external funds requirement is $263,800.
P4-21. Ethics problem
LG 3; Intermediate
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Chapter 4 Cash Flow and Financial Planning 61
Case
Case studies are available on www.myfinancelab.com.
Preparing Martin Manufacturing’s 2016 Pro Forma Financial Statements
In this case, the student prepares pro forma financial statements, using them to determine whether Martin
Manufacturing will require external funding in order to embark on a major expansion program.
a.
Martin Manufacturing Company
Pro Forma Income Statement
for the Year Ended December 31, 2016
Sales revenue $6,500,000 (100%)
Less: Cost of goods sold 4,745,000 (0.73 sales)
Note:Calculations “driven” by cost of goods sold and operating expense (excluding
depreciation, which is given) percentages.
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Chapter 4 Cash Flow and Financial Planning 62
b.
Martin Manufacturing Company
Pro Forma Balance Sheet
December 31, 2016
Assets
Current assets
Liabilities and stockholders’ equity
Current liabilities
1$6,500,000/365 50 days $890,411
c. Based on the pro forma financial statements prepared above, Martin Manufacturing will need to raise about
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Chapter 4 Cash Flow and Financial Planning 63
Spreadsheet Exercise
The answer to Chapter 4’s ACME Company spreadsheet problem is located on the Instructor’s Resource Center at
www.pearsonhighered.com/irc under the Instructor’s Manual.
Group Exercise
Group exercises are available on www.myfinancelab.com.
The focus of this chapter’s exercise is each group’s fictitious firm and its asset depreciation. Students are
asked to first visit the IRS’s website and retrieve information regarding depreciation of property as described in
publication number 946. Using this information each group is asked to provide examples of property depreciation
germane to their firm.
The second set of objectives centers on financial planning. Each group is asked to evaluate their shadow firm’s
statement of cash flows over the recent past and explain any changes. This effort is then paired with similar work
on each group’s fictitious firm. Short- and long-term planning are next derived from the corporation’s strategy
section of its annual report and applied to the fictitious firm. Cash budgeting for the fictitious firm and pro forma
statements from the shadow firm conclude this assignment.
The best advice here is for students to keep it simple. Impress upon them the rapidly increasing complexity of any
budgeting process as the number of accounts is increased. Following the text’s examples and using the information
from the shadow firm should be encouraged.
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