财务管理基础 斯坦利 课后答案Chapter 4

财务管理基础 斯坦利 课后Chapter 4 Chapter 4 Discussion Questions 4-1. What are the basic benefits and purposes of developing pro forma statements and a cash budget? The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the associated financing that will be required. Furthermore, one can track actual events against the projections. Bankers and other lenders also use these financial statements as a guide in credit decisions. 4-2. Explain how the collections and purchases schedules are related to the borrowing needs of the corporation. The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid. To the extent collections do not cover purchasing costs and other financial requirements, the firm must look to borrowing to cover the deficit. 4-3. With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold? LIFO inventory valuation assumes the latest purchased inventory becomes part of the cost of goods sold, while the FIFO method assigns inventory items that were purchased first to the cost of goods sold. In an inflationary environment, the LIFO method will result in a higher cost of goods sold figure and one that more accurately matches the sales dollars recorded at current dollars. 4-4. Explain the relationship between inventory turnover and purchasing needs. The more rapid the turnover of inventory, the greater the need for purchase and replacement. Rapidly turning inventory makes for somewhat greater ease in foreseeing future requirements and reduces the cost of carrying inventory. 4-5. Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement. Rapid growth in sales and profits is often associated with rapid growth in asset commitment. A $100,000 increase in sales may cause a $50,000 increase in assets, with perhaps only $10,000 of the new financing coming from profits. It is very seldom that incremental profits from sales expansion can meet new financing needs. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-113 4-6. Discuss the advantage and disadvantage of level production schedules in firms with cyclical sales. Level production in a cyclical industry has the advantage of allowing for the maintenance of a stable work force and reducing inefficiencies caused by shutting down production during slow periods and accelerating work during crash production periods. A major drawback is that a large stock of inventory may be accumulated during the slow sales period. This inventory may be expensive to finance, with an associated danger of obsolescence. 4-7. What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets? The percent-of-sales forecast is only as good as the functional relationship of assets and liabilities to sales. To the extent that past relationships accurately depict the future, the percent-of-sales method will give values that reasonably represent the values derived through the pro-forma statements and the cash budget. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-114 Problems 4-1. Mr. Eli Lilly is very excited because sales for his nursery and plant company are expected to double from $600,000 to $1,200,000 next year. Eli notes that net assets (assets – liabilities) will remain at 50 percent of sales. His firm will enjoy an 8 percent return on total sales. He will start the year with $120,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit. Solution: Eli Lilly Beginning cash $120,000 – Asset buildup (300,000) (1/2 x $600,000) Profit 96,000 (8% x $1,200,000) Ending cash ($84,000) Deficit No, he will actually end up with a negative cash balance. 4-2. In problem 1 if there had been no increase in sales and all other facts were the same, what would Eli’s ending cash balance be? What lesson do the examples in problems one and two illustrate? Solution: Eli Lilly (continued) Beginning cash $120,000 No asset buildup ----- Profit 48,000 (8% x $600,000) Ending cash $168,000 The lesson to be learned is that increased sales can increase the financing requirements and reduce cash even for a profitable firm. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-115 4-3. Gibson Manufacturing Corp. expects to sell the following number of units of steel cables at the prices indicated under three different scenarios in the economy. The probability of each outcome is indicated. What is the expected value of the total sales projection? Outcome Probability Units Price A 0.20 100 $20 B 0.50 180 $25 C 0.30 210 $30 Solution: Gibson Manufacturing Corporation (1) (2) (3) (4) (5) (6) Expected Total Value Outcome Probability Units Price Value (2 x 5) A .20 100 $20 2,000 400 B .50 180 $25 4,500 2,250 C .30 210 $30 6,300 1,8900 Total expected values $4,540 4-4. ER Medical Supplies had sales of 2,000 units at $160 per unit last year. The marketing manager projects a 25 percent increase in unit volume this year with a 10 percent price increase. Returned merchandise will represent 5 percent of total sales. What is your net dollar sales projection for this year? Solution: ER Medical Supplies Unit volume ................ 2,000 x 1.25 2,500 Price ............................ $160 x 1.10 x $176 Total sales ................... $440,000 Returns (5%) ............... 22,000 Net sales ...................... $418,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-116 4-5. Sales for Ross Pro’s Sports Equipment are expected to be 4,800 units for the coming month. The company likes to maintain 10 percent of unit sales for each month in ending inventory. Beginning inventory is 300 units. How many units should the firm produce for the coming month? Solution: Ross Pro’s Sports Equipment + Projected sales ................... 4,800 units + Desired ending inventory ... 480 (10% x 4,800) – Beginning inventory .......... 300 Units to be produced .......... 4,980 4-6. Digitex, Inc. had sales of 6,000 units in March. A 50 percent increase is expected in April. The company will maintain 5 percent of expected unit sales for April in ending inventory. Beginning inventory for April was 200 units. How many units should the company produce in April? Solution: Digitex, Inc. + Projected sales ............ 9,000 units (6,000 x 1.5) + Desired ending inventory 450 units (5% x 9,000) – Beginning inventory ... 200 units Units to be produced ... 9,250 units Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-117 4-7. Hoover Electronics has beginning inventory of 22,000 units, will sell 60,000 units for the coming month, and desires to reduce ending inventory to 30 percent of beginning inventory. How many units should Hoover produce? Solution: Hoover Electronics + Projected sales ................... 60,000 units + Desired ending inventory ... 6,600 (30% x 22,000) – Beginning inventory .......... 22,000 units Units to be produced .......... 44,600 units 4-8. On December 31 of last year, Barton Air Filters had in inventory 600 units of its product, which cost $28 per unit to produce. During January, the company produced 1,200 units at a cost of $32 per unit. Assuming Barton Air Filters sold 1,500 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? Solution: Barton Air Filters Cost of goods sold on 1,500 units Old inventory: Quantity (Units) ................................................... 600 Cost per unit ......................................................... $ 28 Total ..................................................................... $16,800 New inventory: Quantity (Units) ................................................... 900 Cost per unit ......................................................... $ 32 Total $28,800 Total Cost of Goods Sold ....................................... $45,600 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-118 4-9. At the end of January, Lemon Auto Parts had an inventory of 825 units, which cost $12 per unit to produce. During February the company produced 750 units at a cost of $16 per unit. If the firm sold 1,050 units in February, what was its cost of goods sold? a. Assume LIFO inventory accounting. b. Assume FIFO inventory accounting. Solution: Lemon Auto Parts a. LIFO Accounting Cost of goods sold on 1,050 units New inventory: Quantity (Units) ................................................... 750 Cost per unit ......................................................... $ 16 Total ..................................................................... $12,000 Old inventory: Quantity (Units) ................................................... 300 Cost per unit ......................................................... $ 12 Total $ 3,600 Total Cost of Goods Sold ....................................... $15,600 b. FIFO Accounting Cost of goods sold on 1,050 units Old inventory: Quantity (Units) ................................................... 825 Cost per unit ......................................................... $ 12 Total ..................................................................... $ 9,900 New inventory: Quantity (Units) ................................................... 225 Cost per unit ......................................................... $ 16 Total $ 3,600 Total Cost of Goods Sold ....................................... $13,500 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-119 4-10. Convex Mechanical Supplies produces a product with the following costs as of July 1, 2004: Material . . . . . . . . $ 6 Labor . . . . . . . . . . 4 Overhead . . . . . . . 2 $12 Beginning inventory at these costs on July 1 was 5,000 units. From July 1 to December 1, Convex produced 15,000 units. These units had a material cost of $10 per unit. The costs for labor and overhead were the same. Convex uses FIFO inventory accounting. Assuming Convex sold 17,000 units during the last six months of the year at $20 each, what would gross profit be? What is the value of ending inventory? Solution: Convex Mechanical Supplies Sales (17,000 @ $20) $340,000 Cost of goods sold: Old inventory: Quantity (units) ..................... 5,000 Cost per unit .......................... $ 12 Total ........................................ $60,000 New inventory: Quantity (units) ..................... 12,000 Cost per unit .......................... $ 16 Total ........................................ $192,000 Total cost of goods sold .......... $252,000 Gross profit ............................. $ 88,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-120 4-10. Continued Value of ending inventory: Beginning inventory (5,000 x $12) ......................... $60,000 + Total production (15,000 x $16) ....................... $240,000 Total inventory available for sale ................... $300,000 – Cost of good sold ................. $252,000 Ending inventory..................... $ 48,000 or 3,000 units x $16 = $48,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-121 4-11. Assume in problem 10 that Convex used LIFO inventory accounting instead of FIFO, what would gross profit be? What would be the value of ending inventory? Solution: Convex Mechanical Supplies (Continued) Sales (17,000 @ $20) $340,000 Cost of goods sold: New inventory: Quantity (units) ..................... 15,000 Cost per unit .......................... $ 16 Total ........................................ $240,000 Old inventory: Quantity (units) ..................... 2,000 Cost per unit .......................... $ 12 Total ........................................ $ 24,000 Total cost of goods sold .......... $264,000 Gross profit ............................. $ 76,000 Value of ending inventory: Beginning inventory (5,000 x $12) ......................... $ 60,000 + Total production (15,000 x $16) ....................... $240,000 Total inventory available for sale ................... $300,000 – Cost of good sold ................. $264,000 Ending inventory..................... $ 36,000 OR 3,000 units x $12 = $36,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-122 4-12. Jerrico Wallboard Co. had a beginning inventory of 7,000 units on January 1, 2004. The costs associated with the inventory were: Material . . . . . . . . $9.00 unit Labor . . . . . . . . . . 5.00 unit Overhead . . . . . . . 4.10 unit During 2004, Jerrico produced 28,500 units with the following costs: Material . . . . . . . . $11.50 unit Labor . . . . . . . . . . 4.80 unit Overhead . . . . . . . 6.20 unit Sales for the year were 31,500 units at $29.60 each. Jerrico uses LIFO accounting. What was the gross profit? What was the value of ending inventory? Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-123 4-12. Continued Solution: Jerrico Wallboard Co. Sales (31,500 @ $29.60) $932,400 Cost of goods sold: New inventory: Quantity (units) ..................... 28,500 Cost per unit .......................... $ 22.50 Total ........................................ $641,250 Old inventory: Quantity (units) ..................... 3,000 Cost per unit .......................... $ 18.10 Total ........................................ $ 54,300 Total cost of goods sold .......... $695,550 Gross profit ............................. $236,850 Value of ending inventory: Beginning inventory (7,000 x $18.10) .................... $126,700 + Total production (28,500 x $22.50) .................. $641,250 Total inventory available for sale .................................. $767,950 – Cost of good sold ................. $695,550 Ending inventory..................... $ 72,400 OR 4,000 units x $18.10 = $72,400 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-124 4-13. J. Lo’s Clothiers has forecast credit sales for the fourth quarter of the year as: September (actual) .................. $70,000 Fourth Quarter October ................................... $60,000 November ............................... 55,000 December ................................ 80,000 Experience has shown that 30 percent of sales are collected in the month of sale, 60 percent in the following month, and 10 percent are never collected. Prepare a schedule of cash receipts for J. Lo’s Clothiers covering the fourth quarter (October through December). Solution: J. Lo’s Clothiers September October November December Credit sales $70,000 $60,000 $55,000 $80,000 30% Collected in month of 18,000 16,500 24,000 sales 60% Collected in month after 42,000 36,000 33,000 sales Total cash receipts $60,000 $52,500 $57,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-125 4-14. Victoria’s Apparel has forecast credit sales for the fourth quarter of the year as: September (actual) .................. $50,000 Fourth Quarter October................................... $40,000 November ............................... 35,000 December ............................... 60,000 Experience has shown that 20 percent of sales are collected in the month of sale, 70 percent in the following month, and 10 percent are never collected. Prepare a schedule of cash receipts for Victoria’s Apparel covering the fourth quarter (October through December). Solution: Victoria’s Apparel September October November December Credit sales $50,000 $40,000 $35,000 $60,000 20% Collected in month of 8,000 7,000 12,000 sales 70% Collected in month after 35,000 28,000 24,500 sales Total cash receipts $43,000 $35,000 $36,500 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-126 4-15. Pirate Video Company has made the following sales projections for the next six months. All sales are credit sales. March ......................... $24,000 June ........................... $28,000 April ........................... 30,000 July ........................... 35,000 May ............................ 18,000 August ....................... 38,000 Sales in January and February were $27,000 and $26,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale. Prepare a monthly cash receipts schedule for the firm for March through August. Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is expected to be collected later? Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-127 4-15. Continued Solution: Watt's Lighting Stores Cash Receipts Schedule January February March April May June July August Sales $27,000 $26,000 $24,000 $30,000 $18,000 $28,000 $35,000 $38,000 Collections (30% of current sales) 7,200 9,000 5,400 8,400 10,500 11,400 Collections (40% of prior month's sales) 10,400 9,600 12,000 7,200 11,200 14,000 S-128 Collections (20% of sales 2 months earlier) 5,400 5,200 4,800 6,000 3,600 5,600 Total cash receipts $23,000 $23,800 $22,200 $21,600 $25,300 $31,000 Still due (uncollected) in August: ，，Bad debts: ($24,000 + 30,000 + 18,000 + 28,000 + 35,000 + 38,000) .1 = (173,000) .1 = $17,300 ，To be collected from August sales: ($38,000 .60) = $22,800 ，To be collected from July sales: ($35,000 .20) = $7,000 $17,300 + $22,800 + $7,000 = $47,100 due Expected to be collected: $47,100 due – $17,300 bad debts = $29,800 to be collected Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-16. The Elliot Corporation has forecast the following sales for the first seven months of the year: January ....................... $12,000 May ........................... $12,000 February...................... 16,000 June ........................... 20,000 March ......................... 18,000 July ........................... 22,000 April ........................... 24,000 Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labor costs will run $6,000 per month, and fixed overhead is $3,000 per month. Interest payments on the debt will be $4,500 for both March and June. Finally, Elliot sales force will receive a 3 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.) Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-129 4-16. Continued Solution: Elliot Corporation Cash Payments Schedule Dec. Jan. Feb. March April May June July Sales $12,000 $16,000 $18,000 $24,000 $12,000 $20,000 $22,000 Purchases (20% of next month's sales) 2,400 3,200 3,600 4,800 2,400 4,000 4,400 Payment (40% of current purchases) 1,280 1,440 1,920 960 1,600 1,760 Material payment (60% S-130 of previous 1,440 1,920 2,160 2,880 1,440 2,400 month's purchases) Total payment for materials 2,720 3,360 4,080 3,840 3,040 4,160 Labor costs 6,000 6,000 6,000 6,000 6,000 6,000 Fixed overhead 3,000 3,000 3,000 3,000 3,000 3,000 Interest payments 4,500 4,500 Sales commission (3% of 3,060 $102,000) Total payments $11,720 $12,360 $17,580 $12,840 $12,040 $20,720 Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-17. Wright Lighting Fixtures forecasts its sale in units for the next four months as follows: March ..................................... 4,000 April ....................................... 10,000 May ........................................ 8,000 June ........................................ 6,000 Wright maintains an ending inventory for each month in the amount of one and one half times the expected sales in the following month. The ending inventory for February (March's beginning inventory) reflects this policy. Materials cost $7 per unit and are paid for in the month after production. Labor cost is $3 per unit and is paid for in the month incurred. Fixed overhead is $10,000 per month. Dividends of $14,000 are to be paid in May. Eight thousand units were produced in February. Compute a production schedule and a summary of cash payments for March, April, and May. Remember that production in any one month is equal to sales plus desired ending inventory minus beginning inventory. Solution: Boswell Corporation Production Schedule March April May June 4,000 10,000 8,000 6,000 Forecasted unit sales +Desired ending 15,000 12,000 9,000 inventory 6,000 15,000 12,000 –Beginning inventory 13,000 7,000 5,000 Units to be produced Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-131 4-17. Continued Cash Payments Feb March April May 8,000 13,000 7,000 5,000 Units produced Materials ($7/unit) month after $56,000 $91,000 $49,000 production Labor ($3/unit) month 39,000 21,000 15,000 of production 10,000 10,000 10,000 Fixed overhead 14,000 Dividends $105,000 $122,000 $88,000 Total Cash Payments 4-18. Dina’s Lamp Company has forecast its sales in units as follows: January ............................. 1,000 May .............................. 1,550 February............................ 800 June .............................. 1,800 March ............................... 900 July .............................. 1,400 April ................................. 1,400 Dina always keeps an ending inventory equal to 120 percent of the next month's expected sales. The ending inventory for December (January's beginning inventory) is 1,200 units, which is consistent with this policy. Materials cost $14 per unit and are paid for the month after purchase. Labor cost is $7 per unit and is paid in the month the cost is incurred. Overhead costs are $8,000 per month. Interest of $10,000 is scheduled to be paid in March, and employee bonuses of $15,500 will be paid in June. Prepare a monthly production schedule and a monthly summary of cash payments for January through June. Dina produced 800 units in December. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-132 4-18. Continued Solution: Dina’s Lamp Company Production Schedule Jan. Feb. March April May June July Forecasted unit sales 1,000 900 1,400 1,550 1,800 1,400 + Desired ending inventory 960 1,080 1,680 1,860 2,160 1,680 – Beginning inventory 1,200 960 1,080 1,680 1,860 2,160 = Units to be produced 760 920 1,500 1,580 1,850 1,320 Summary of Cash Payments S-133 Dec. Jan. Feb. March April May June Units produced 800 760 920 1,500 1,580 1,850 1,320 Material cost ($14/unit) month after purchase $11,200 $10,640 $12,880 $21,000 $22,120 $25,900 Labor cost ($5/unit) month incurred 5,320 6,440 10,500 11,060 12,950 $9,240 Overhead cost 8,000 8,000 8,000 8,000 8,000 8,000 Interest 10,000 Employee bonuses 15,500 Total Cash Payments $24,520 $25,080 $41,380 $40,060 $43,070 $58,640 Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-19. Graham Potato Company has projected sales of $6,000 in September, $10,000 in October, $16,000 in November, and $12,000 in December. Of the company's sales, 20 percent are paid for by cash and 80 percent are sold on credit. Experience shows that 40 percent of accounts receivable are paid in the month after the sale. Determine collections for November and December. Also assume that the company's cash payments for November and December are $13,000 and $6,000, respectively. The beginning cash balance in November is $5,000, which is the desired minimum balance. Prepare a cash budget with borrowing needed or repayments for November and December. (You will need to prepare a cash receipts schedule first.) Solution: Graham Potato Company Cash Receipts Schedule September October November December Sales $6,000 $10,000 $16,000 $12,000 Credit sales 4,800 8,000 12,800 9,600 (80%) Cash sales 1,200 2,000 3,200 2,400 (20%) Collections in month 3,200 5,120 after sales (40%) Collections 2,880 4,800 two months after sales (60%) Total cash receipts $9,280 $12,320 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-134 4-19. Continued 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 4-20. Juan’s Taco Company has restaurants in five college towns. Juan wants to expand into Austin and College Station and needs a bank loan to do this. Mr. Bryan, the banker, will finance construction if Juan 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 .. $120,000 January .... $190,000 April forecast .. $230,000 December ... 140,000 February .. 210,000 March ...... 230,000 Of Juan’s sales, 30 percent are for cash and the remaining 70 percent are on credit. Of credit sales, 40 percent are paid in the month after sale and 60 percent are paid in the second month after the sale. Materials cost 20 percent of sales and are paid for in cash. Labor expense is 50 percent of sales and its paid in the month of sales. Selling and administrative expense is 5 percent of sales and is also paid in the month of sale. Overhead expense is $12,000 in cash per month; depreciation expense is $25,000 per month. Taxes of $20,000 and dividends of $16,000 will be paid in March. Cash at the beginning of January is $70,000 and the minimum desired cash balance is $65,000. 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. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-135 4-20. Continued Solution: Juan’s Taco Company Cash Receipts Schedule November December January February March April Sales $120,000 $140,000 $190,000 $210,000 $230,000 $230,000 Credit sales (70%) 84,000 98,000 133,000 147,000 161,000 161,000 Cash sales (30%) 36,000 42,000 57,000 63,000 69,000 69,000 Collections (month after credit sales) 40% 33,600 39,200 53,200 58,800 64,400 S-136 Collections (two months after credit sales) 60% 50,400 58,800 79,800 88,200 Total Cash Receipts $146,600 $175,000 $207,600 Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-20. Continued Juan’s Taco Company Cash Payments Schedule January February March Payments for Material Purchases (20% of current month’s sales) $ 38,000 $ 42,000 $46,000 Labor Expense (50% of sales) 95,000 105,000 115,000 Selling and Admin. Exp. (5% of sales) 9,500 10,500 11,500 Overhead 12,000 12,000 12,000 Taxes 20,000 Dividends 16,000 S-137 Total Cash Payments* $154,500 $169,500 $220,500 *The $25,000 of depreciation is excluded because it is not a cash expense. Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-20. Continued Juan’s Taco Company Cash Budget January February March Total Cash Receipts $146,600 $175,000 $207,600 Total Cash Payments 154,500 169,500 220,500 Net Cash Flow (7,900) 5,500 (12,900) Beginning Cash Balance 70,000 65,000 67,600 Cumulative Cash Balance 62,100 70,500 54,700 Monthly Loan or (repayment) 2,900 (2,900) 10,300 Cumulative Loan Balance 2,900 -0- 10,300 Ending Cash Balance $ 65,000 $ 67,600 $ 65,000 S-138 Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-21. Hickman Avionics’ actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September. Sales Purchases April (actual) $410,000 $220,000 May (actual) 400,000 210,000 June (forecast) 380,000 200,000 July (forecast) 360,000 250,000 August (forecast) 390,000 300,000 September (forecast) 420,000 220,000 The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, 20 percent are collected in the month after the sale and 80 percent are collected two months after. Hickman pays for 40 percent of its purchases in the month after purchase and 60 percent two months after. Labor expense equals 10 percent of the current month's sales. Overhead expense equals $15,000 per month. Interest payments of $40,000 are due in June and September. A cash dividend of $20,000 is scheduled to be paid in June. Tax payments of $35,000 are due in June and September. There is a scheduled capital outlay of $300,000 in September. Hickman Avionics’ ending cash balance in May is $20,000. The minimum desired cash balance is $15,000. Prepare a schedule of monthly cash receipts, monthly cash payments, and a complete monthly cash budget with borrowing and repayments for June through September. The maximum desired cash balance is $50,000. Excess cash (above $50,000) is used to buy marketable securities. Marketable securities are sold before borrowing funds in case of a cash shortfall (less than $15,000). Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-139 4-21. Continued Solution: Hickman Avionics Cash Receipts Schedule April May June July Aug. Sept. Sales $410,000 $400,000 $380,000 $360,000 $390,000 $420,000 Credit Sales (90%) 369,000 360,000 342,000 324,000 351,000 378,000 Cash Sales (10%) 41,000 40,000 38,000 36,000 39,000 42,000 Collections (month after sale) 20% 73,800 72,000 68,400 64,800 70,200 Collections (second S-140 month after sale) 80% 295,200 288,000 273,600 259,200 Total Cash Receipts $405,200 $392,400 $377,400 $371,400 Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-21. Continued Hickman Avionics Cash Payments Schedule April May June July Aug. Sept. Purchases $220,000 $210,000 $200,000 $250,000 $300,000 $220,000 Payments (month after purchase—40%) 88,000 84,000 80,000 100,000 120,000 Payments (second month after purchase— 60%) 132,000 126,000 120,000 150,000 S-141 Labor Expense (10% of sales) 38,000 36,000 39,000 42,000 Overhead 15,000 15,000 15,000 15,000 Interest Payments 40,000 40,000 Cash Dividend 20,000 Taxes 35,000 35,000 Capital Outlay 300,000 Total Cash Payments $364,000 $257,000 $274,000 $702,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-21. Continued Hickman Avionics Cash Budget June July August September Cash Receipts $405,200 $392,400 $377,400 $371,400 Cash Payments 364,000 257,000 274,000 702,000 Net Cash Flow 41,200 135,400 103,400 (330,600) Beginning Cash Balance 20,000 50,000 50,000 50,000 Cumulative Cash Balance 61,200 185,400 153,400 (280,600) S-142 Monthly Borrowing or (Repayment) -- -- -- *80,600 Cumulative Loan Balance -- -- -- 80,600 Marketable Securities Purchased 11,200 135,400 103,400 -- (Sold) -- -- -- 250,000 Cumulative Marketable Securities 11,200 146,600 250,000 -- Ending Cash Balance 50,000 50,000 50,000 50,000 *Cumulative Marketable Sec. (Aug) $250,000 Cumulative Cash Balance (Sept) –280,600 Required (ending) Cash Balance 50,000 Monthly Borrowing –$80,600 Copyright ? 2005 by The McGraw-Hill Companies, Inc. 4-22. Carter Paint Company has plants in nine midwestern 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. Balance Sheet (in $ millions) Assets Liabilities and Stockholders' Equity Cash ............................ $ 5 Accounts payable ................ $15 Accounts receivable .... 15 Accrued wages .................... 6 Inventory .................... 30 Accrued taxes ...................... 4 Current assets ............ $50 Current liabilities ............... $25 Fixed assets ................. 40 Notes payable ...................... 30 Common stock .................... 15 Retained earnings ................ 20 Total liabilities and Total assets ................. $90 stockholders' equity ........... $90 Carter Paint has an aftertax profit margin of 5 percent and a dividend payout ratio of 30 percent. If sales grow by 10 percent next year, determine how many dollars of new funds are needed to finance the expansion. (Assume Carter Paint is already using assets at full capacity and that plant must be added.) Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-143 4-22. Continued Solution: Carter Paint Company ,L，，，，，，Required New Funds,,S,,S,PS1,D2SS ，，，，,S,10%$100 mil. ,S,$10,000,000 9025，，，，RNF ,$10,000,000,$10,000,000, 100100 ，，，， .05$110,000,000 1,.30 ，，，，，，，，,.90$10,000,000,.25$10,000,000,.05$110,000,000.70,$9,000,000,$2,500,000,$3,850,000 RNF,$2,650,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-144 4-23. Jordan Aluminum Supplies has the following financial statements, which are representative of the company's historical average. Income Statement Sales ....................................................................... $300,000 Expenses ................................................................. 247,000 Earnings before interest and taxes ........................... $ 53,000 Interest .................................................................... 3,000 Earnings before taxes .............................................. $ 50,000 Taxes ...................................................................... 20,000 Earnings after taxes ................................................. 30,000 Dividends................................................................ $ 18,000 Balance Sheet Assets Liabilities and Stockholders' Equity Cash ......................... $ 8,000 Accounts payable ............. $ 6,000 Accounts receivable . 20,000 Accrued wages ................. 2,000 Inventory ................. 62,000 Accrued taxes ................... 4,000 Current assets ......... $ 90,000 Current liabilities ............ $ 12,000 Fixed assets .............. 100,000 Notes payable ................... 10,000 Long-term debt ................. 20,000 Common stock ................. 80,000 Retained earnings ............. 68,000 Total liabilities and Total assets .............. $190,000 stockholders' equity ........ $190,000 Jordan is expecting a 20 percent increase in sales next year, and management is concerned about the company's need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing stores. Of liabilities, only current liabilities vary directly with sales. Using the percent-of-sales method, determine whether Jordan Aluminum has external financing needs. (Hint: A profit margin and payout ratio must be found from the income statement.) Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-145 4-23. Continued Solution: Jordan Aluminum Supplies Earnings after taxes$30,000 Profit margin,,,10% Sales$300,000 Dividends$18,000 Payout ratio,,,60% Earnings30,000 Change in Sales,20%，$300,000,$60,000Spontaneous Assets = Current Assets = Cash + Acc. Rec. + Inventory Spontaneous Liabilities = Acc. Payable + Accr. Wages + Accr. Taxes ,L RNF,,S,,S,PS1,D，，，，，，2SS $90,000$12,000 ,$60,000,$60,000,.10$360,0001,.60，，，，，，，， $300,000$300,000 ，，，，，，，，,.30$60,000,.04$60,000,.10$360,000.4 ,$18,000,$2,400,$14,400 RNF,$1,200 The firm needs $1,200 in external funds. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-146 4-24. Cambridge Prep Shops, a national clothing chain, had sales of $200 million last year. The business has a steady net profit margin of 12 percent and a dividend payout ratio of 40 percent. The balance sheet for the end of last year is shown on page __. Balance Sheet End of Year ($ millions) Assets Liabilities and Stockholders' Equity Cash ............................ $ 10 Accounts payable ................ $ 15 Accounts receivable .... 15 Accrued expenses ................ 5 Inventory .................... 50 Other payables ..................... 40 Plant and equipment .... 75 Common stock .................... 30 Retained earnings ................ 60 Total liabilities and Total assets ................. $150 stockholders' equity ........... $150 Cambridge’s marketing staff tells the president that in the coming year there will be a large increase in the demand for tweed sport coats and various shoes. A sales increase of 15 percent is forecast for the Prep Shop. All balance sheet items are expected to maintain the same percent-of-sales relationships as last year, except for common stock and retained earnings. No change is scheduled in the number of common stock shares outstanding, and retained earnings will change as dictated by the profits and dividend policy of the firm. (Remember the net profit margin is 12 percent.) a. Will external financing be required for the company during the coming year? b. What would be the need for external financing if the net profit margin went up to 14 percent and the dividend payout ratio was increased to 70 percent? Explain. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-147 4-24. Continued Solution: Cambridge Prep Shops ,L，，，，，，a. Required New Funds,,S,,S,PS1,D2SS ,S,15%，$200,000,000,$30,000,000 15060，，，，RNF,$30,000,000,$30,000,000,.12 200200 ，，，，$230,000,000 1,.4 ，，，，,.75$30,000,000,.30$30,000,000,.12 ，，，，$230,000,000 .6 ,$22,500,000,$9,000,000,$16,560,000，，RNF,$3,060,000 A negative figure for required new funds indicates that an excess of funds ($3.06 mil.) is available for new investment. No external funds are needed. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-148 4-24. Continued b. RNF,$22,500,000,$9,000,000,.14$230,000,000，， ，1,.7，， ,$22,500,000,$9,000,000,$9,660,000 $3,840,000 external funds required The net profit margin increased slightly, from 12% to 14%, which decreases the need for external funding. The dividend payout ratio increased tremendously, however, from 40% to 70%, necessitating more external financing. The effect of the dividend policy change overpowered the effect of the net profit margin change. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-149 Comprehensive Problems CP 4-1. The Landis Corporation had 2004 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows: Percent Cash ................................................ 5% Accounts receivable ......................... 15 Inventory ......................................... 25 Net fixed assets ................................ 40 Accounts payable ............................. 15 Accruals .......................................... 10 Profit margin after taxes ................... 6% The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the beginning of the year 2005 was $33 million. Common stock and the company’s long term bonds are constant at $10 million and $5 million, respectively. Notes payable are currently $12 million. a. How much additional external capital will be required for next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.) b. What will happen to external fund requirements if Landis Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these separately. c. Prepare a pro forma balance sheet for 2005 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part b in answering this question (that is, use the original information and part a in constructing your pro forma balance sheet). Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-150 CP 4-1. Continued CP Solution: Landis Corporation ,Sales,.15，$100 million,15 million Spontaneous assets,5%，15%，25%，40%,85% Spontaneous liabilities,15%，10%,25% AL，，，，，，a. RNF,,S,,S,PS1,d2SS ，，，，，，，，,.85$15 million,.25$15 million,.06$1151,.5 ,$12.75 million,$3.75 million,$3.45 million ,$5.55 million b. If Landis reduces the payout ratio, the company will retain more earnings and need less external funds. A slower growth rate means that less assets will have to be financed and in this case, less external funds would be needed. A declining profit margin will lower retained earnings and force Landis Corporation to seek more external funds. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-151 CP 4-1. Continued c. Balance Sheet—December 31, 2005 (Dollars in Millions) Cash ............................. $ 5.75 Accounts Payable ....... $17.25 Accounts Receivable .... 17.25 Accruals ..................... 11.50 1Inventory ...................... 28.75 Notes Payable ............ 17.55 Net Fixed Assets 46.00 Long-Term Bonds ...... 5.00 Common Stock .......... 10.00 2 _____ Retained Earnings ...... 36.45 $97.75 $97.75 1Original notes payable plus required new funds. This is the plug figure. 22005 retained earnings (beginning of 2005) + PS (1-.D) or $33 mil + 2 $3.45 mil CP 4-2. The difficult part of solving a problem of this nature is to know what to do with the information contained within a story problem. Therefore, this problem will be easier to complete if you rely on Chapter 4 for the format of all required schedules. The Adams Corporation makes standard-size 2-inch fasteners, which it sells for $155 per thousand. Mr. Adams is the majority owner and manages the inventory and finances of the company. He estimates sales for the following months to be: January ........................ $263,500 (1,700,000 fasteners) February ...................... $186,000 (1,200,000 fasteners) March .......................... $217,000 (1,400,000 fasteners) April ............................ $310,000 (2,000,000 fasteners) May ............................. $387,500 (2,500,000 fasteners) Last year Adams Corporation's sales were $175,000 in November and $232,500 in December (1,500,000 fasteners). Mr. Adams is preparing for a meeting with his banker to arrange the financing for the first quarter. Based on his sales forecast and the following information he has provided, your job as his new financial analyst is to prepare a monthly cash budget, a monthly and quarterly pro forma income statement, a pro forma Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-152 quarterly balance sheet, and all necessary supporting schedules for the first quarter. Past history shows that Adams Corporation collects 50 percent of its accounts receivable in the normal 30-day credit period (the month after the sale) and the other 50 percent in 60 days (two months after the sale). It pays for its materials 30 days after receipt. In general, Mr. Adams likes to keep a two-month supply of inventory in anticipation of sales. Inventory at the beginning of December was 2,600,000 units. (This was not equal to his desired two-month supply.) The major cost of production is the purchase of raw materials in the form of steel rods, which are cut, threaded, and finished. Last year raw material costs were $52 per 1,000 fasteners, but Mr. Adams has just been notified that material costs have risen, effective January 1, to $60 per 1,000 fasteners. The Adams Corporation uses FIFO inventory accounting. Labor costs are relatively constant at $20 per thousand fasteners, since workers are paid on a piecework basis. Overhead is allocated at $10 per thousand units, and selling and administrative expense is 20 percent of sales. Labor expense and overhead are direct cash outflows paid in the month incurred, while interest and taxes are paid quarterly. The corporation usually maintains a minimum cash balance of $25,000, and it puts its excess cash into marketable securities. The average tax rate is 40 percent, and Mr. Adams usually pays out 50 percent of net income in dividends to stockholders. Marketable securities are sold before funds are borrowed when a cash shortage is faced. Ignore the interest on any short-term borrowings. Interest on the long-term debt is paid in March, as are taxes and dividends. As of year-end, the Adams Corporation balance sheet was as follows: Adams Corporation Balance Sheet December 31, 200X Assets Current assets: Cash.................................................. $ 30,000 Accounts receivable .......................... 320,000 Inventory .......................................... 237,800 Total current assets ......................... $ 587,800 Fixed assets: Plant and equipment .......................... 1,000,000 Less: Accumulated depreciation ...... 200,000 800,000 Total assets ......................................... $1,387,800 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-153 CP 4-2. Continued Liabilities and Stockholders' Equity Accounts payable ................................ $ 93,600 Notes payable ..................................... 0 Long-term debt, 8 percent ................... 400,000 Common stock .................................... 504,200 Retained earnings ............................... 390,000 Total liabilities and stockholders' equity $1,387,800 Comprehensive Financial Problem: Adams Corporation Forecasting with Seasonal Production December January February March Projected Unit Sales 1,500,000 1,700,000 1,200,000 1,400,000 +Desired Ending Inventory (2 months 2,900,000 2,600,000 3,400,000 4,500,000 supply) –Beginning Inventory 2,600,000 2,900,000 2,600,000 3,400,000 Units to be Produced 1,800,000 1,400,000 2,000,000 2,500,000 Monthly Cash Payments December January February March Units to be produced 1,800,000 1,400,000 2,000,000 2,500,000 Materials (from $ 93,600 $ 84,000 $ 120,000 previous month) Labor ($20 per $ 28,000 $ 40,000 $ 50,000 thousand units) Overhead ($10 per $ 14,000 $ 20,000 $ 25,000 thousand units) Selling & adm. $ 52,700 $ 37,200 $ 43,400 expense (20% of sales) Interest $ 8,000 Taxes (40% tax rate) $ 64,560* Dividends $ 48,420* Total Payments $ 188,300 $ 181,200 $ 359,380 *See the pro forma income statement, which follows this material later on, for the development of these values. Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-154 CP Solution: Adams Corporation Monthly Cash Receipts Nov. Dec. Jan. Feb. Mar. Sales $175,000 $232,500 $263,500 $186,000 $217,000 Collections (50% of Previous month) 87,500 $116,250 131,750 93,000 Collections (50% of 2 months earlier) 87,500 116,250 131,750 Total Collections $203,750 $248,000 $224,750 Monthly Cash Flow January February March Cash Receipts $203,750 $248,000 $224,750 Cash Payments 188,300 181,200 359,380 Net Cash Flow 15,450 66,800 (134,630) Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-155 CP 4-2. Continued Adams Corporation Cash Budget January February March Net Cash Flow $15,450 $66,800 $(134,630) Beginning Cash Balance 30,000 25,000 25,000 Cumulative Cash Balance $45,450 $91,800 ($109,630) Loans and (Repayments) -0- -0- 47,380 Cumulative Loans -0- -0- 47,380 Marketable Securities 20,450 66,800 (87,250) Cumulative Marketable Securities 20,450 87,250 -0- Ending Cash Balance $25,000 $25,000 $25,000 Adams Corporation Pro Forma Income Statement Jan. Feb. Mar. Total Sales $263,500 $186,000 $217,000 $666,500 Cost of Goods Sold 139,400 98,400 126,000 363,800 Gross Profit 124,100 87,600 91,000 302,700 Selling and Admin. Expense 52,700 37,200 43,400 133,300 Interest Expense 2,667 2,667 2,666 8,000 Net Profit Before Tax $ 68,733 $ 47,733 $ 44,934 $161,400 Taxes 27,493 19,093 17,974 64,560 Net Profit After Tax $ 41,240 $ 28,640 $ 26,960 $ 96,840 Less: Common Dividends 48,420 Increase in Retained Earnings $ 48,420 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-156 CP 4-2. Continued Adams Corporation Cost of Goods Sold Unit Cost per thousand Unit cost per thousand ststbefore January 1 after January 1 Material .......... $52 $60 Labor.............. 20 20 Overhead ........ 10 10 $82 $90 Ending inventory as of December 31 was 2,900,000, therefore, sales for January and February had a cost of goods sold per thousand units of $82, and March sales reflect the increased cost of $90 per thousand units using FIFO inventory methods. Pro Forma Balance Sheet (March) Assets Liabilities & Stockholders' Equity Current Assets: Current Liabilities: Cash ...................... $ 25,000 Accounts Payable $ 150,000 Accounts Receivable 310,000 Notes Payable 47,380 Inventory ............... 405,000 Long-Term Debt 400,000 Plant & Equip: Stockholders' Equity: Net Plan 800,000 Common Stock 504,200 Total Assets $1,540,000 Retained Earnings, Total Liabilities & 438,420 Stockholders' Equity $1,540,000 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-157 CP 4-2. Continued Explanation of Changes in the Balance Sheet: Cash = ending cash balance from cash budget in March Accounts receivable $217,000 = all of March sales 93,000 plus 50% of Feb. $310,000 sales Inventory = ending inventory in March of 4,500,000 units at $90 per thousand Plant and equipment did not change since we did not include depreciation. RE = Old RE + (NI – dividends) = $390,000 + ($96,840 – $48,240) = $438,420 Copyright ? 2005 by The McGraw-Hill Companies, Inc. S-158