Chapter 04: Financial Forecasting
21. Schedule of cash payments (LO2) The Denver Corporation has forecast the following
sales for the first seven months of the year:
January……… ……. $15,000 May……… $15,000
February……… ….. 17,000 June……… 21,000
March……… ……… 19,000 July…….. 23,000
April……… ……….. 25,000
Monthly material purchases are set equal to 40 percent of forecast sales for the next month.
Of the total material costs, 50 percent are paid in the month of purchase and 50 percent in
the following month. Labor costs will run $4,500 per month, and fixed overhead is $4,500
per month. Interest payments on the debt will be $3,500 for both March and June. Finally,
the Denver salesforce will receive a 3.00 percent commission on total sales for the first six
months of the year, to be paid on June 30.
Prepare a monthly summary of cash payments for the six-month period from January
through June. (Note: Compute prior December purchases to help get total material
payments for January.)
Chapter 04: Financial Forecasting
Graham Potato Company (Continued)
Cash Budget
November
December
Cash receipts
$ 9,280
$12,320
Cash payments
13,000
6,000
Net cash flow
(3,720)
6,320
Beginning cash balance
5,000
5,000
Cumulative cash balance
1,280
11,320
Monthly loan (or
repayment)
3,720
(3,720)
Cumulative loan balance
3,720
-0-
Ending cash balance
$ 5,000
$ 7,600
25. Complete cash budget (LO2) Harry’s Carryout Stores has eight locations. The firm
wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the
banker, will finance construction if the firm can present an acceptable three-month
financial plan for January through March. The following are actual and forecasted sales
figures:
Actual Forecast Additional Information
November……….. $260,000 January ……….. $400,000 April forecast …… $400,000
December ……….. 340,000 February ……… 440,000
March……… . 410,000
Of the firm’s sales, 60 percent are for cash and the remaining 40 percent are on credit. Of
credit sales, 20 percent are paid in the month after sale and 80 percent are paid in the
second month after the sale. Materials cost 20 percent of sales and are purchased and
received each month in an amount sufficient to cover the following month’s expected sales.
Materials are paid for in the month after they are received. Labor expense is 50 percent of
sales and is paid for in the month of sales. Selling and administrative expense is 15 percent
of sales and is also paid in the month of sales. Overhead expense is $31,000 in cash per
month.
Depreciation expense is $10,600 per month. Taxes of $8,600 will be paid in January,
and dividends of $5,000 will be paid in March. Cash at the beginning of January is
$92,000, and the minimum desired cash balance is $87,000.
For January, February, and March, prepare a schedule of monthly cash receipts, monthly
cash payments, and a complete monthly cash budget with borrowings and repayments.
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27. Percent-of-sales method (LO3) Owen’s Electronics has nine 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……………………………………..
$ 7
Accounts payable …………………..
$20
Accounts receivable ……………….
25
Accrued wages ………………………
7
Inventory ………………………………
28
Accrued taxes ………………………..
13
Current assets ………………………
$60
Current liabilities ………………….
$40
Fixed assets …………………………..
45
Notes payable ………………………..
15
Common stock ……………………….
20
Retained earnings …………………..
30
Total assets …………………………...
$105
Total liabilities and
stockholders’ equity ……………..
$105
Owen’s has an after-tax profit margin of 10 percent and a dividend payout ratio of 45
percent.
If sales grow by 20 percent next year, determine how many dollars of new funds are
needed to finance the growth.