Exam 14: Short-Term Financial Planning

The percent of sales method assumes that all assets and all liabilities increase proportionally with sales,but retained earnings does not.

CraftCo,Inc.'s projected sales for the first six months of 2012 are given below: 40% of sales are collected in cash at time of sale,50% are collected in the month following the sale,and the remaining 10% are collected in the second month following the sale.Cost of goods sold is 60% of sales.Purchases are made in the month prior to the sales,and payments for purchases are made in the month of the sale.Total other cash expenses are $40,000/month.The company's cash balance as of February 28,2012 will be $25,000.Excess cash will be used to retire short-term borrowing (if any).CraftCo,Inc.has no short term borrowing as of February 28,2012 Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $15,000 at the beginning of each month.What is CraftCo,Inc.'s total cash disbursements for April 2012?

The ZYX Corporation is planning to request a line of credit from its bank and wants to estimate its cash needs for the month of September.The following sales forecasts have been made for 2010: July $500,000 August 400,000 September 300,000 October 200,000 November 100,000 Collection estimates were obtained from the credit collection department as follows: 20% collected within the month of sale; 70% collected the first month following this sale; and 10% collected the second month following the sale.Payments for labor and raw materials are typically made in the month in which these costs are incurred.Total labor and raw material costs each month are 50% of sales.General administrative expenses are $30,000 per month,lease payments are $10,000 per month,and depreciation charges are $20,000 per month.The corporation tax rate is 40%; however,no corporate taxes are paid in September.Prepare a pro forma income statement and cash budget for September.

The balance sheet for the Long Drive Golf Company on September 30,2010 is presented below: Long Drive Golf Company Balance Sheet September 30,2010 The treasurer of the firm wants to issue $1,200,000 in long-term bonds to be used as follows: 1.$240,000 to reduce accounts payable 2.$192,000 to retire notes payable 3.$128,000 to increase cash on hand 4.$640,000 to increase inventories a.Assuming that the loan is obtained,construct a pro forma balance sheet for December 31,2010,for Long Drive Golf Company that reflects the use of the funds provided. b.Was the liquidity of Long Drive Golf Company improved by the loan?

When economies of scale exist,the percent of sales method will overestimate the assets required and therefore overestimate the amount of discretionary financing needed.

Discretionary financing needs will be lower if ________.Assume "all else equal."

LPD Logistics,Inc.'s projected sales for the first six months of 2010 are given below. 20% of sales are collected in the month of the sale,75% are collected in the month following the sale,and 5% are written off as uncollectible.Cost of goods sold is 80% of sales.Purchases are made the month prior to the sales and are paid during the month the purchases are made (i.e.goods sold in March are bought and paid for in February).Total other cash expenses are $35,000/month.The company's cash balance as of February 1,2010 will be $30,000.Excess cash will be used to retire short-term borrowing (if any).LPD has no short term borrowing as of February 28,2010.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $20,000 at the beginning of each month.What is LPD's projected total disbursements for April?

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts payable.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.The firm's investment in accounts payable in the current year is $2,218,500.What is the projection for next year's accounts payable?

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's inventory.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.The firm's investment in inventory in the current year is $5,890,200.What is the projection for next year's inventory?

MDX Sales Corp.is expecting a 10% increase in sales next year.MDX has an inventory balance of $1,000,000 and uses the percent of sales forecasting method.Which of the following could explain why the inventory forecast of $1,100,000 might be too high?

A discretionary form of financing would be

All of the following are examples of sources of discretionary financing EXCEPT

Using the 2012 financial statements for DRE Corporation and this additional information,prepare a pro forma income statement and balance sheet for the year 2013.Determine the discretionary financing needed (DFN)and assume that if the DFN is positive,the company will increase long-term debt,and if DFN is negative,the company will pay back some long-term debt. Sales for next year (2013)are expected to increase by $300,000 to $1,800,000.The firm is running efficiently and at full capacity so that all assets and spontaneous liabilities are expected to increase proportionally with sales.The dividend payout ratio for 2013 will be 40%. DRE Corporation 2012 Financial Statements

CBD Computer Inc.is attempting to estimate its needs for funds during each of the months covering the third quarter of 20XX.Pertinent information is given below: a.Past and estimated future sales for 20XX: b.Rent expense is $2,500 per month. c.A quarterly interest payment on $100,000 in 7% notes payable is to be paid during September,20XX. d.Wages and salaries are estimated as follows: Payments are made within the month in which the wages are earned. e.Sixty percent of sales are for cash,with the remaining 40% collected in the month following the sale. f.CBD pays 80% of the sales price for merchandise and makes payment in the same month in which the sales occur,although purchases are made in the month prior to the anticipated sales. g.CBD plans to pay $7,500 in cash for a new forklift truck in July. h.Short-term loans can be obtained at the end of each month at 13% annual interest with interest paid during each month for which the loan is outstanding. i.CBD's ending cash balance for June 30,200X is $67,000: the minimum balance the firm wishes to have in any month is $35,000. Required: Set up a cash budget for CBD for the quarter ended September 30,20XX.

Spontaneous sources of funds refers to all of the below EXCEPT

Plato Industries' projected sales for the first six months of 2012 are given below: 20% of sales are collected in cash at time of sale,50% are collected in the month following the sale,and the remaining 30% are collected in the second month following the sale.Cost of goods sold is 85% of sales.Purchases are made in the month prior to the sales,and payments for purchases are made in the month of the sale.Total other cash expenses are $70,000/month.The company's cash balance as of February 28,2012 will be $10,000.Excess cash will be used to retire short-term borrowing (if any).Plato has no short term borrowing as of February 28,2012.Ignore any interest on short-term borrowing.The company must have a minimum cash balance of $40,000 at the beginning of each month.What is Plato Industries' ending cash balance (before borrowing)in March?

If a firm currently has excess capacity,then using the percent of sales method to forecast its fixed asset balance will likely result in an overestimate of the fixed asset balance and an inflated amount of discretionary financing needed.

The cash budget is composed of four elements: cash receipts,cash disbursements,depreciation,and the net change in cash for the period.

A company calculates its discretionary financing needed and determines this amount of capital cannot be raised at a reasonable cost.Which of the following would reduce the amount of discretionary financing needed?

Accrued expenses represent a spontaneous form of financing.