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105
2018
2019
Accounts payable
300
400
Bank loan
150
250
Accrued liabilities
100
150
Total current liabilities
550
800
Retained earnings
1,850
2,450
Total liabilities and equity
3,400
4,500
A. Using yearend data, calculate the inventory-to-sale conversion period, the sale-to-cash
conversion period, and the purchase-to-payment conversion period for 2018 and 2019.
Note: because inventories, accounts receivable, accounts payable, and accrued liabilities
are not available for 2017, averages of these accounts cannot be calculated for 2018. So
for 2018 versus 2019 comparative purposes, we use yearend data for these accounts.
Inventory-to-Sale Conversion Period = (Yearend Inventories) / (COGS / 365)
2018: 1450 / (2250 / 365) = 1450/6.1644 = 235.22
2019: 2000 / (2700 / 365) = 2000/7.3973 = 270.37
Note: the calculation for 2019 using average receivables would be:
Sale-to-Cash Conversion Period = (Average Receivables) / (Net Sales / 365)
2019: [(500 + 800) / 2] / (4500 / 365) = 650/12.3288 = 52.72
B. Determine the cash conversion cycle for each year and discuss the changes that took
place, if any.
Chapter 6: Managing Cash Flow
106
Cash Conversion Cycle = Inventory-to-Sale Conversion Period + Sale-to-Cash
Conversion Period – Purchase-to-Payment Conversion Period
SPREADSHEET EXERCISES/PROBLEMS
[Note: The following activities are for students with spreadsheet software skills.]
11. Short-term financial planning for the PDC Company was described during the early part of
this chapter. Refer to the PDC Company’s projected monthly operating schedules in Table 6.2.
PDC’s monthly sales for the remainder of 2020 are expected to be:
September $80,000
October $100,000
B. Prepare cash budgets for each of the last four months of 2020 for the PDC Company
and describe how the forecast affects the end of month cash balances.
See spreadsheet solution below.
C. Prepare the PDC Company’s projected monthly income statements for the August
through December period.
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107
E. Prepare the PDC Company’s projected monthly statements of cash flow for the August
through December period.
See spreadsheet solution below.
March April May June July Aug. Sept. Oct. Nov. Dec. Jan.
Schedule 1: Sales Forecast 92,000 115,000 184,000 138,000 115,000 92,000 80,000 100,000 130,000 160,000 100,000
Credit sales, 40% 36,800 46,000 73,600 55,200 46,000 36,800 32,000 40,000 52,000 64,000
Cash sales, 60% 55,200 69,000 110,400 82,800 69,000 55,200 48,000 60,000 78,000 96,000
Schedule 4: Disbursements for Purchases
50% of last month’s purchases 38,640 59,570 51,520 41,860 33,810 28,840 33,600 43,400 53,900
50% of this month’s purchases 59,570 51,520 41,860 33,810 28,840 33,600 43,400 53,900 39,200
Disbursements for merchandise 98,210 111,090 93,380 75,670 62,650 62,440 77,000 97,300 93,100
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108
Cash Budget April May June July Aug. Sept. Oct. Nov. Dec.
Beginning cash balance 23,000 23,000 23,000 23,000 29,487 37,562 32,672 18,822 5,422
Cash receipts
Collections from customers 105,800 156,400 156,400 124,200 101,200 84,800 92,000 118,000 148,000
Total cash available for needs, before fin. 128,800 179,400 179,400 147,200 130,687 122,362 124,672 136,822 153,422
Total cash needed 159,735 176,065 157,780 133,745 116,125 112,690 128,850 154,400 156,200
Excess of total cash -30,935 3,335 21,620 13,455 14,562 9,672 -4,178 -17,578 -2,778
Financing
New Borrowing 30,935 0 0 0 0 0 0 0 0
Repayments 2,871 21,199 6,865 0 0 0 0 0
Loan balance 30,935 28,064 6,865 0 0 0 0 0 0
Interest 0 464 421 103 0 0 0 0 0
Total effects of financing 30,935 -3,335 -21,620 -6,968 0 0 0 0 0
Cash balance 23,000 23,000 23,000 29,487 37,562 32,672 18,822 5,422 20,222
Budgeted Income Statements
Sales 92,000 115,000 184,000 138,000 115,000 92,000 80,000 100,000 130,000 160,000
COGS -64,400 -80,500 -128,800 -96,600 -80,500 -64,400 -56,000 -70,000 -91,000 -112,000
Gross Margin 27,600 34,500 55,200 41,400 34,500 27,600 24,000 30,000 39,000 48,000
Chapter 6: Managing Cash Flow
109
12. Artero Corporation, discussed in Problem 7, is a retailer of toy products. The firm’s
management team recently extended the monthly sales forecasts that were prepared for the
last three months of 2020 for an additional 6 months in 2021. These forecasts were
presented to Swen Artero, the firm’s president, as follows.
Accounting Statement of Cash Flows
Cash Flows From Activities
Net Income -460 5,976 1,419 -563 -2,760 -3,960 -1,960 1,040 4,040
Adjustments to Net Inc for CF
Decrease in Prepaids 460 460 460 460 460 460 460 460 460
Increase in Accrued Liab. 1,725 5,175 -3,450 -1,725 -1,725 -900 1,500 2,250 2,250
Decrease in Inventory -38,640 25,760 12,880 12,880 6,720 -11,200 -16,800 -16,800 33,600
Decrease in A/P 20,930 -8,050 -9,660 -8,050 -4,970 4,760 9,800 10,500 -14,700
Increase in A/R -9,200 -27,600 18,400 9,200 9,200 4,800 -8,000 -12,000 -12,000
Decrease in Def. Inc. Tax 0 0 0 0 0 0 0 0 0
Total Adjustments -23,575 -3,105 19,780 13,915 10,835 -930 -11,890 -14,440 10,760
Net Cash Flow From Opps (Acct.) -24,035 2,871 21,199 13,352 8,075 -4,890 -13,850 -13,400 14,800
Cash Flows From Investing
Capex -6,900 0 0 0 0 0 0 0 0
Net Cash Used by Ops/Investments -30,935 2,871 21,199 13,352 8,075 -4,890 -13,850 -13,400 14,800
Cash Flows from Financing
Equity Issues 0 0 0 0 0 0 0 0 0
Dividends 0 0 0 0 0 0 0 0 0
Debt Issues 30,935 -2,871 -21,199 -6,865 0 0 0 0 0
Net Cash Flows from Financing 30,935 -2,871 -21,199 -6,865 0 0 0 0 0
Net Decrease in Cash and Cash Equiv. 0 0 0 6,487 8,075 -4,890 -13,850 -13,400 14,800
Beginning Cash Balance 23,000 23,000 23,000 23,000 29,487 37,562 32,672 18,822 5,422
Ending Cash Balance 23,000 23,000 23,000 29,487 37,562 32,672 18,822 5,422 20,222
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110
A. Use the income statement related data and the balance sheet information from Problem 7
to prepare monthly income statements, balance sheets, and statements of cash flow for
October through December of 2020. What is the maximum amount of bank borrowing
that would be needed?
Artero Corporation
Income Statement
(Thousands of Dollars)
Sept. 2020
Oct. 2020
Nov. 2020
Dec. 2020
Sales
$ 700
$ 1,000
$ 1,500
$ 3,000
Cost of Goods Sold
560
800
1,200
2,400
Gross Margin
140
200
300
600
Depreciation
Other Expense
105
210
Interest
108
170
362
Taxes (40%)
145
Net Income
102
217
Balance Sheet
(Thousands of Dollars)
Sept.30, 20
Oct.31, 20
Nov. 30, 20
Dec. 31, 20
Cash
$ 50
$ 80
$ 80
$ 80
Accounts Receivable
700
1,000
1,500
3,000
Inventories
500
500
500
500
Total Currents Assets
1,250
1,580
2,080
3,580
Fixed Assets, Net
750
730
720
Total Assets
Accounts Payable
Notes Payable
800
800
800
400
400
400
400
Additional Funds Needed
643
Equity
800
967
1,184
Total Liabilities & Equity
Statement of Cash Flow
(Thousands of Dollars)
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111
10/31/2020
11/30/2020
12/31/2020
Cash Flow From Operations
Net Income
$ 65
$ 102
$ 217
+ Depreciation
10
10
10
– Increase In A/R
300
500
1,500
– Increase In Inventory
0
0
0
Cash Flow from Investing
0
0
0
Cash Flow from Financing
0
0
0
Total Cash Flow
Required Balance
80
80
80
Additional Funds Needed
255
388
1,273
Cumulative Funds Needed
255
643
1,916
Ending Cash Balance
80
80
80
As shown in both Balance Sheet and Statement of Cash Flow, $1,916,000 was needed to
support the projected sales in the coming three months.
B. Prepare monthly income statements, balance sheets, and statements of cash flow for the
Chapter 6: Managing Cash Flow
112
Artero Corporation Pro Forma Statements 2021
Income Statement (Thousands of Dollars)
Jan. 15
Feb. 15
Mar. 15
Apr. 15
May. 15
June. 15
July. 15
Aug. 15
Sep. 15
Oct. 15
Nov. 15
Dec. 15
2021
Sales
$1,500
$ 1,000
$ 700
$ 700
$ 700
$ 700
$ 900
$ 1,100
$ 1,400
$ 1,700
$ 2,800
$ 4,000
$ 17,200
Cost of Goods Sold
1,200
800
560
560
560
560
720
880
1,120
1,360
2,240
3,200
$ 13,760
Gross Margin
300
200
140
140
140
140
180
220
280
340
560
800
3,440
Depreciation
10
10
10
10
10
10
10
12
12
12
12
12
130
Other Expense
105
70
49
49
49
49
63
77
98
119
196
280
1,204
Interest
31
15
12
12
12
12
12
12
12
12
12
20
175
154
105
69
69
69
69
95
119
158
197
340
488
1,931
Taxes (40%)
62
42
28
28
28
28
38
48
63
79
136
195
773
Net Income
92
63
41
41
41
41
57
71
95
118
204
293
1,159
Balance Sheet 2021 (Thousands of Dollars)
Jan. 15
Feb. 15
Mar. 15
Apr. 15
May. 15
June. 15
July. 15
Aug. 15
Sep. 15
Oct. 15
Nov.15
Dec. 15
Cash Required
$ 80
$ 80
$ 80
$ 80
$ 80
$ 80
$ 80
$ 80
$ 80
$ 80
$ 80
$ 80
Cash Surplus
259
611
662
713
765
532
415
222
52
Total Cash
339
691
742
793
845
612
495
302
132
80
80
Accounts Receivable
1,500
1,000
700
700
700
700
900
1,100
1,400
1,700
2,800
4,000
Inventories
500
500
500
500
500
500
500
500
500
500
500
500
Total Currents Assets
2,080
1,839
1,891
1,942
1,993
2,045
2,012
2,095
2,202
2,332
3,380
4,580
Fixed Assets, Net
710
700
690
680
670
660
750
738
726
714
702
690
Total Assets
$ 2,790
$ 2,539
$ 2,581
$ 2,622
$ 2,762
$ 2,833
$ 2,928
$ 3,046
$ 4,082
$ 5,270
Accounts Payable
Notes Payable
800
800
800
800
800
800
800
800
800
800
800
800
400
400
400
400
400
400
400
400
400
400
400
400
Additional Funds Needed
314
832
1727
Total Liabilities
1,514
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
2,032
2,927
Chapter 6: Managing Cash Flow
113
Statement of Cash Flow (Thousands of Dollars)
1/31/21
2/28/21
3/31/21
4/30/21
5/31/21
6/30/21
7/31/21
8/31/21
9/30/21
10/31/21
11/30/21
12/31/21
Cash Flow From Operations
Net Income
$ 92
$ 63
$ 41
$ 41
$ 41
$ 41
$ 57
$ 71
$ 95
$ 118
$ 204
$ 293
+ Depreciation
10
10
10
10
10
10
10
12
12
12
12
12
– Increase In A/R
–1,500
–500
–300
0
0
0
200
200
300
300
1,100
1,200
– Increase In Inventory
0
0
0
0
0
0
0
0
0
0
0
0
Cash Flow From
573
351
51
51
51
Cash Flow from Investing
0
0
0
0
0
0
0
0
0
0
0
Cash Flow from Financing
0
0
0
0
0
0
0
0
0
0
0
0
Total Cash Flow
573
351
51
51
51
Beginning Cash Balance
80
80
80
80
80
80
80
80
80
80
80
80
Required Balance
80
80
80
80
80
80
80
80
80
80
80
80
Additional Funds Needed
573
351
51
51
51
Cumulative Funds Needed
0
0
0
0
0
0
0
0
0
832
1,727
Cash Surplus
259
611
662
713
765
532
415
222
52
Ending Total Cash
80
339
691
742
793
845
612
495
302
132
80
80
As shown on the company’s balance sheet and statement of cash flow, started from February of 2021, the cash surplus account
increased monthly through the first-half of the year (with a peak in June). This indicated that the positive cash flow from operations in
January and through much of February were used to repay the $1.9 million additional bank borrowing needed during the last three
months of 2020, and the borrowing will be paid off by February of 2021.
Chapter 6: Managing Cash Flow
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C. Based on your financial statement projections for the first six months of 2021, indicate
whether new bank borrowing will be needed.
13. Artero Corporation, discussed in Problems 7 and 12, is a retailer of toy products. This is a
continuation of Problem 12. The firm’s management team recently extended the monthly sales
forecasts through the last six months of 2021. Artero expects to spend $100,000 on fixed assets
in July 2021 and depreciation charges will increase to $12,000 per month beginning in August
2021.
A. Prepare monthly income statements, balance sheets, and statements of cash flow for the last
six months of 2021.
B. Based on your financial statement projections for the last six months of 2021 indicate (1)
whether new bank borrowing will be needed to finance the seasonal sales pattern and (2) if a
loan is needed, when does the need start occurring and what is the maximum amount
needed?
C. Assume that sales are forecasted for the first three months of 2022 as follows: January = $3
million, February = $2 million, and March = $1 million. Will Artero be able to pay off any
bank borrowing that is needed in 2021? Based on your analyses, what type(s), if any, of bank
loan(s) are needed in 2021?
Artero Corporation
Pro Forma Income Statement 2022 (Thousands of Dollars)
Jan 2022
Feb 2022
Mar.2022
Chapter 6: Managing Cash Flow
115
Depreciation
12
12
12
Other Expense
210
70
Interest
297
12
106
Taxes (40%)
42.4
Net Income
63.6
Pro Forma Balance Sheet (Thousands of Dollars)
Jan. 2022
Feb. 2022
Mar. 2022
Cash required
80
80
80
Cash Surplus
645
1720
Accounts Receivable
3000
2000
1000
Inventories
500
500
500
Total Currents Assets
3580
3225
3300
Fixed Assets, Net
678
666
654
Total Assets
4258
3891
3954
Accounts Payable
Notes Payable
800
800
800
400
400
400
Additional Funds Needed
506
Total Liabilities
1706
1200
1200
Equity
2552
2691
2754
Total Liabilities & Equity
4258
3891
3954
As indicated above in the projected 2022 pro forma statement, Artero will be able to pay off all
borrowing of $1,727,000 in December, 2021 by February of 2022. A surplus cash of $645,000
will also appear in February of 2022. In this case, short-term borrowing will be sufficient for
Artero to obtain all of the additional funds needed in 2021.
MINI CASE: SCANDI HOME FURNISHINGS, INC.
Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2016. Sales
during the first full year (2017) of operation reached $1.3 million. Sales increased by 15 percent
in 2018 and another 20 percent in 2019. However, profits after increasing in 2018 over 2017 fell
Chapter 6: Managing Cash Flow
116
allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian
design can be traced to the “elegant curves” of art nouveau from which designers were able to
produce aesthetically pleasing, structurally strong modern furniture. Danish furnishings and the
home furnishings produced by the other Scandinavian countries—Sweden, Norway, and
Finland—are made using wood (primarily oak, maple, and ash), aluminum, steel, and high-grade
right thing.
Following are the three years of income statements and balance sheets for the Scandi
Home Furnishings Corporation. Kaj has felt that in order to maintain a competitive advantage
that he would need to continue to expand sales. After first concentrating on selling Scandinavian
home furnishings in the northeast in 2017 and 2018, he decided to enter the west coast market.
SCANDI HOME FURNISHINGS, INC.
Chapter 6: Managing Cash Flow
117
SCANDI HOME FURNISHINGS, INC.
Note: 30,000 shares of common stock were issued to Kaj Rasmussen and the venture investors
when Scandi Home Furnishings was incorporated in mid-2016.
A. An analysis of the cash conversion cycle should also help Kaj understand what has been
happening to the operations of Scandi. Prepare an analysis of the average conversion
periods for the three components of the cash conversion cycle for 2017-2018 and 2018-
2019. Explain was has happened in terms of each component of the cycle.
Ratios are based on the current year’s income statement amounts and average amounts
(past year and current year) for balance sheet items.
Chapter 6: Managing Cash Flow
118
Purchase-to-Payment for 2018-19:
Average Accounts Payable = (170,000 + 180,000)/2 = 175,000
Average Accrued Liabilities = (70,000 + 80,000)/2 = 75,000
175,000 + 75,000 = 250,000
Cost of Goods Sold per Day = 1,260,000/365 = 3,452.05
250,000/3,452.05 = 72.42 days
Cash Conversion Cycle (in Days):
2017-18 2018-19 Change
Inventory-to-Sale 192.64 159.33 Better
Sale-to-Cash 55.97 62.86 Worse
Purchase-to-Payment (85.17) (72.42) Worse
Cash Conversion Cycle 163.44 149.77 Better
B. Kaj has been able to obtain some industry ratio data from the home furnishings industry
trade association of which he is a member. The industry association collects proprietary
Chapter 6: Managing Cash Flow
119
Conversion Periods (in Days):
Scandi
Scandi Corporation Industry Compared to
2017-18 2018-19 Average Industry
Inventory-to-Sale 192.64 159.33 200 Better
Sale-to-Cash 55.97 62.86 60 Worse