Balance Sheet and Inventory

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 urrent 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 requirement s 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. | | | |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. | Chapter 4 Problems 1. 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. 1 Solution: Eli Lilly Beginning cash$120,000 – Asset buildup(300,000)(1/2 ? $600,000) Profit 96,000(8% ? $1,200,000) Ending cash($84,000)Deficit No, he will actually end up with a negative cash balance. 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 1 and 2 illustrate? 4-2. Solution: Eli Lilly (continued) Beginning cash$120,000 No asset buildup—– Profit 48,000(8% ? $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. 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? OutcomeProbabilityUnitsPrice A0. 20100$20 B0. 5018025 C0. 3021030 4-3. Solution: Gibson Manufacturing Corporation |(1) |(2) |(3) |(4) |(5) |(6) | | | | | | |Expected | | | | | |Total |Value | Outcome |Probability |Units |Price |Value |(2 ? 5) | |A |. 20 |100 |$20 |2,000 |400 | |B |. 50 |180 |$25 |4,500 |2,250 | |C |. 0 |210 |$30 |6,300 |1,8900 | | | |Total expected value |$4,540 | 4. The Alliance Corp. expects to sell the following number of units of copper 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? OutcomeProbabilityUnitsPrice A0. 30200$15 B0. 5032030 C0. 2041040 4-4. Solution: Alliance Corporation |(1) |(2) |(3) |(4) |(5) |(6) | | | | | | |Expected | | | | | |Total |Value | |Outcome |Probability |Units |Price |Value |(2 ? ) | |A |. 30 |200 |$15 |$3,000 | 900 | |B |. 50 |320 |$30 |9,600 | 4,800 | |C |. 20 |410 |$40 |16,400 | 3,280 | | | |Total expected value |$8,980 | . 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? 4-5. Solution: ER Medical Supplies | |Unit volume 2,000 ? 1. 25 |2,500 | | |Price $160 ? . 10 |$176 | | |Total Sales |$440,000 | | |Returns (6%) |22,000 | | |Net Sales |$418,000 | 6. Cyber Security Systems had sales of 3,000 units at $50 per unit last year. The marketing manager projects a 20 percent increase in unit volume sales this year with a 10 percent price increase. Returned merchandise will represent 6 percent of total sales. What is your net dollar sales projection for this year? 4-6. Solution: Cyber Security Systems |Unit volume 3,000 ? 1. 20 |3,600 | |Price $50 ? 1. 10 |? 55 | |Total Sales |$198,000 | |Returns (6%) |11,880 | |Net Sales |$186,120 | 7. 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? 4-7. Solution: Ross Pro’s Sports Equipment |+ |Projected sales |4,800 |units | |+ |Desired ending inventory |480 |(10% ? ,800) | |– |Beginning inventory | 300 | | | |Units to be produced |4,980 | | | | | 8. 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? 4-8. Solution: Digitex, Inc. |+ |Projected sales |9,000 |units (6,000 ? 1. 5) | |+ |Desired ending inventory |450 |units (5% ? ,000) | |– |Beginning inventory | 200 |units | | |Units to be produced |9,250 |units | 9. 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? 4-9. Solution: Hoover Electronics + |Projected sales |60,000 |units | |+ |Desired ending inventory |6,600 |(30% ? 22,000) | |– |Beginning inventory | 22,000 |units | | |Units to be produced |44,600 |units | 0. On December 31 of last year, Barton Air Filters had in inventory 600 units of its product, which costs $2 8 per unit to produce. During January, the company produced 1,200 units at a cost of $32 per unit. Assuming Barton Air Filters sold 1,500 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? 4-10. Solution: Barton Air Filters |Cost of goods sold on 1,500 units | | | | | | | |Old inventory: | | | | Quantity (Units) |600 | | | Cost per unit |$ 28 | | | Total |$ 16,800 | | | | | | |New inventory: | | | | Quantity (Units) |900 | | | Cost per unit |$ 32 | | | Total |$28,800 | | |Total Cost of Goods Sold |$45,600 | 11. On December 31 of last year, Wolfson Corporation had in inventory 400 units of its product, which cost $21 per unit to produce. During January, the company produced 800 units at a cost of $24 per unit. Assuming that Wolfson Corporation sold 700 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? 4-11. Solution: Wolfson Corporation |Cost of goods sold on 700 units | | | | |Old inventory: | | | Quantit y (Units) |400 | | Cost per unit |$ 21 | | Total |$ 8,400 | | | | |New inventory: | | | Quantity (Units) |300 | | Cost per unit |$ 24 | | Total |$ 7,200 | |Total Cost of Goods Sold |$15,600 | 12. 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. 4-12. 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 |$15,600 | 13. Convex Mechanical Supplies produces a product with the following costs as of July 1, 2009: Material$ 6 Labor4 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 that 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? 4-13. 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 | | | | | | | | |Value of ending | | | | | |inventory: | | | | | |Beginning inventory | | | | | |(5,000 ( $ 12) | |$ 60,000 | | | |+ Total production | | | | | |(15,000 ( $16) | |$240,000 | | | |Total inventory | | | | | |available for sale | |$300,000 | | | |– Cost of good sold | |$252,000 | | | |Ending inventory | |$ 48,000 | | | |or | | | | | |3,000 units ( $16 = $48,000 | 14. Assume in problem 13 that Convex used LIFO accounting instead of FIFO. What would gross profit be? What is the value of ending inventory? 4-14. 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: | | | | | |Be ginning inventory | | | | | |(5,000 ( $12) †¦Ã¢â‚¬ ¦ |$ 60,000 | | |+ |Total production | | | | | |(15,000 ( $16) †¦.. | |$240,000 | | | |Total inventory | | | | | |available for sale †¦.. | |$300,000 | | |– |Cost of good sold †¦.. | |$264,000 | | | |Ending inventory †¦.. |$ 36,000 | | | |OR | | | | | |3,000 units ( $12 = $36,000 | 15. Jerrico Wallboard Co. had a beginning inventory of 7,000 units on January 1, 2008. The costs associated with the inventory were: Material$9. 00 unit Labor5. 00 unit Overhead4. 10 unit During 2004, Jerrico produced 28,500 units with the following costs: Material$11. 50 unit Labor4. 80 unit Overhead5. 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? 4-15. Solution: Jerrico Wallboard Co. | |Sales (31,500 @ $29. 0) | | |$932,400 | | |Cost of goods sold: | | | | | |New inventory: | | | | | | Quantity (units) |28,500 | | | | | Cost per unit |$ 22. 50 | | | | |Total | |$641,250 | | | |Old inventory: | | | | | | Quantity (units) |3,000 | | | | | Cost per unit |$ 18. 0 | | | | |Total | |$ 54,300 | | | |Total cost of goods | | | | | |sold | | |$695,550 | | |Gross profit | | |$236,850 | | | | | | | | |Value of ending inventory: | | | | | |Beginning inventory | | | | | |(7,000 ( $18. 10) | |$126,700 | | | |+ Total production | |$641,250 | | | |(28,500 ( $22. 50) | | | | |Total inventory | | | | | |available for sale | |$767,950 | | | |– Cost of good sold | |$695,550 | | | |Ending inventory | |$ 72,400 | | | |OR | | | | | |4,000 units ( $18. 10 = $72,400 | 16. 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 November55,000 December80,000 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). 4-16. Solution: J. Lo’s Clothiers | |September |October |November |December | |Credit sales |$70,000 |$60,000 |$55,000 $80,000 | |30% Collected in month of sales | | | | | | | |18,000 |16,500 |24,000 | |60% Collected in month after | | | | | |sales | |42,000 |36,000 |33,000 | |Total cash receipts | | | | | | | |$60,000 |$52,500 |$57,000 | 17. Victoria’s Apparel has forecast credit sales for the fourth quarter of the year as: September (actual)$50,000 Fourth Quarter October$40,000 November35,000 December60,000 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). 4-17. Solution: Victoria’s Apparel | |September |October |November |December | |Credit sales |$50,000 |$40,000 |$35,000 $60,000 | |20% Collected in month of sales| | | | | | | |8,000 |7,000 |12,000 | |70% Collected in month after | | | | | |sales | |35,000 |28,000 |24,500 | |Total cash receipts | | | | | | | |$43,000 |$35,000 |$36,500 | 18. Pirate Video Company has made the following sales projections for the next six months. All sales are credit sales. March$24,000June$28,000 April30,000July35,000 May18,000August38,000 Sales in Janu ary 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? 4-18. Solution: Pirate Video Company Cash Receipts Schedule | |January |February |March |April | Forecasted unit sales |4,000 |10,000 |8,000 |6,000 | |+Desired ending inventory |15,000 |12,000 |9,000 | | |–Beginning inventory |6,000 |15,000 |12,000 | | |Units to be produced |13,000 |7,000 |5,000 | | |Cash Payments | | |Feb |March |April |May | |Units produced |8,000 |13,000 |7,000 |5,000 | |Materials ($7/unit) month after production | | | | | | | |$56,000 |$91,000 |$49,000 | |Labor ($3/unit) mon th of production | | | | | | | |39,000 |21,000 |15,000 | |Fixed overhead | |10,000 |10,000 |10,000 | |Dividends | | | |14,000 | |Total Cash Payments | |$105,000 |$122,000 |$88,000 | 21. Dina’s Lamp Company has forecast its sales in units as follows: |January |1,000 | |February |800 | |March |900 | |April |1,400 | |May |1,550 | |June |1,800 | |July |1,400 | Dina’s 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 in 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. 4-21. 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 | | |Dec. |Jan. |Feb. |M arch |April |May |June | |Units roduced |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 | 22. 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, while the remaining 60 percent are paid two months after. Determine collections for November and December. Also assume Graham’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. ) 4-22. Solution: Graham Potato Company Cash Receipts Schedule |September |October |November |December | |Sales |$6,000 |$10,000 |$16,000 |$12,000 | |Credit sales (80%) |4,800 |8,000 |12,800 |9,600 | |Cash sales (20%) |1,200 |2,000 |3,200 |2,400 | |Collections in month after| | | | | |sales (40%) | | |3,200 |5,120 | |Collections two months | | | | | |after sa les (60%) | | |2,880 |4,800 | |Total cash receipts | | | | | | | | |$9,280 |$12,320 | Graham Potato Company (Continued) Cash Budget | |November |December | |Cash receipts |$ 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 | 23. 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. 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 is also paid in the month of sales. Selling and administrative expense is 5 percent of sales and is also paid in the month of sales. 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. 4-23. 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 | |Collections (two months after credit | | | | | | | |sales) 60% | | |50,400 |58,800 |79,800 |88,200 | |Total Cash Receipts | | |$146,600 |$175,000 |$207,600 | | 4-23. (Continued) Juan’s Taco Company Cash Payments Schedule | |January |February |March | |Payments for Material Purchases (20% of current month’s sales) |$ 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 | |Total Cash Payments* |$154,500 |$169,500 |$220,500 | *The $25,000 of depreciation is excluded because it is not a cash expense. 4-23. (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 | 24. Hickman Avionics’s 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 later. 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 a nd September. There is a scheduled capital outlay of $300,000 in September. Hickman Avionics’s 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). 4-24. 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 |342,00 |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 month after sale) 80% | | | | | | | | | | | | | | | | | | |295,200 |288,000 |273,600 |259,2 00 | |Total Cash Receipts | | |$405,200 |$392,400 |$377,400 |$371,400 | 4-24. (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 |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 | 4-24. (Continued) Hickman Avionics Cash Budget | |June |July |August |September | |Cash Receipts |$405,200 |$392,400 |$377,400 |$371,400 | |Cash Payments |364,000 |257,000 274,0 00 |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) | |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 25. 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) AssetsLiabilities and Stockholders’ Equity Cash$ 5Accounts payable$15 Accounts receivable15Accrued wages6 Inventory30Accrued taxes4 Current assets50 Current liabilities25 Fixed assets 40Notes payable30 Common stock15 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. ) 4-25. Solution: Carter Paint Company [pic] [pic] [pic] [pic] [pic][pic] [pic] 26. 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 AssetsLiabilities and Stockholders’ Equity Cash $ 8,000Accounts payable$ 6,000 Accounts receivable20,000Accrued wages2,000 Inventory62,000Accrued taxes4,000 Current assets$ 90,000 Current liabilities$ 12,000 Fixed assets 100,000Notes payable10,000 Long-term debt20,000 Common stock80,000 Retained earnings68,000 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. Among 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. ) 4-26. Solution: Jordan Aluminum Supplies [pic] Change in Sales = 20% ? $300,000 = $60,000 Spontaneous Assets = Current Asserts = Cash + Acc. Rec. + Inventory Spontaneous Liabilities = Acc. Payable + Accr. Wages + Accr. Taxes [pic] The firm needs $1,200 in external funds. 27. 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 below. Balance Sheet End of Year (in $ millions) AssetsLiabilities and Stockholders’ Equity Cash$ 10Accounts payable$ 15 Accounts receivable15Accrued expenses5 Inventory50Other payables40 Plant and equipment 75Common stock30 Retained earnings 60 Total liabilities and Total assets$150 stockholders’ equity$150 Cambridge’s marketing staff tells the president that in this 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 Prep Shop 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. * This included fixed assets are the firm is at full capacity. 4-27. Solution: Cambridge Prep Shops a. [pic] [pic] [pic] [pic] 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. b. [pic] [pic] 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 f