Chapter 4 Cash Flow and Financial Planning 67
P4-13. Cash flow concepts (LG 4; Basic)
Note to instructor: There are a variety of possible answers to this problem, depending on student
assumptions. The question is designed to provoke discussion of differences among cash flows,
income, and assets.
Cash
Pro Forma
Pro Forma
P4-14 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
Opti-
mistic
Chapter 4 Cash Flow and Financial Planning 69
c. Pro Forma Income Statement – Metroline Manufacturing, Inc
Year Ending December 31, 2020 (Fixed and Variable Data)
N
N
et profits after taxes $ 227,400
Less: Cash dividends 70,000
To retained earnings $ 157,400
Note: Variable cost and expense percentages were found by dividing 2019 variable
cost or expense ($) by sales ($) and rounding to third decimal place.
P4-17 Pro forma income statement: Scenario analysis (LG 5; Challenge)
a. Pro Forma Income Statement—Allen Products, LP
Year Ending December 31, 2020
Pessimistic Most Likely Optimistic
Sales
$
900
,
000
$
1
,
125
,
000
$
1
,
280
,
000
from the “most likely” baseline. In reality, however, some costs/expenses are fixed, so total
costs/expenses will not decline as much as projected. In short, the percent-of-sales method
understates costs/expenses and overstates profit relative to the fixed-variable method when sales
are falling. The opposite occurs in the optimistic case—that is, the percent-of-sales method
assumes all costs/expenses rise by a given percentage of sales when in reality only the variable
© 2019 Pearson Education, Inc.
Gross profits $485,300 $ 669,125 $ 795,760
Less operating expense
Fixed 180,000 180,000 180,000
Variable (5.8%)
b
52,200 65,250 74,240
Operating profits $253,100 $ 423,875 $ 541,520
© 2019 Pearson Education, Inc.
P4-22 Ethics problem (LG 3; Intermediate)
Investors welcome increased transparency, accountability, and integrity. Speedy dissemination of
negative information will cause a firm’s stock price to fall sooner than it otherwise would have. But a
consistent policy of releasing negative information quickly (rather than trying to bury it) would signal
the firm’s strong commitment to ethical business practices. And over the long run, investors should
Case studies are available on www.pearson.com/mylab/finance.
Preparing Martin Manufacturing’s Pro Forma Financial Statements
In this case, the student will prepare pro forma financial statements and use them to determine whether Martin
Manufacturing will require external funding to embark on a major expansion program.
a. Martin Manufacturing Company—Pro Forma Income Statement (Year Ending 2020)
Sales revenue $6,500,000 (100%)
Less: Cost of goods sold 4,745,000 (0.73 × sales)
Gross profits $1,755,000 (0.27 × sales)
Note: Calculations were “driven” by cost of goods sold and operating expense percentages (excluding
depreciation, which is given).
© 2019 Pearson Education, Inc.
Gross fixed assets $2,493,819
Less: Accumulated depreciation 685,000
N
et fixed assets $1,808,819
Total assets $3,402,087
Liabilities and stockholders’ equity
Paid-in capital in excess of par 593,750
Retained earnings 344,8003
Total stockholders’ equity $1,388,550
Total $3,215,800
External funds required 186,287
© 2019 Pearson Education, Inc.