Exam 14: Short-Term Financial Planning

The forecasted retained earnings balance is equal to (current retained earnings/current sales)times projected sales for next year.

The key ingredient in a firm's financial planning is an accurate sales forecast.

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 gross profit for April?

Plimpton Sales presents income statements for the first three months of this year.Revenues are $1,000,000 in January,$1,200,000 in February,and $1,400,000 in March,while expenses total $800,000 in January,$900,000 February,and $1,000,000 in March.Despite the positive net income,the controller believes Plimpton Sales needs to arrange short-term financing of $300,000 to make payroll the next month.Which of the following statements is MOST correct?

Matterhorn,Inc.had the following sales for the past six months.Matterhorn collects its credit sales 30% in the month of sale,60% one month after the sale,and 10% two months after the sale. What are Matterhorn's total cash receipts for the month of May?

Discretionary financing needed is equal to projected total assets minus projected total liabilities.

A firm's cash position would most likely be hurt by

The cash budget represents a detailed plan of future cash flows.

Discretionary financing accounts include all of the following EXCEPT

Spontaneous sources of funds refers to all of the below EXCEPT

The primary purpose of a cash budget is to

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?

In order to reduce discretionary financing needed,a profitable company could decrease its dividend payout ratio.

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.

The percent of sales method provides a more detailed plan for future financing needs than the cash budget because both pro forma income statements and balance sheets are used in the analysis.

The balance sheet of the Emery Company is presented below: Emery Company Balance Sheet March 31,2010 (Millions of Dollars) For the year ending March 31,2010,Jackson had sales of $58 million.The common stockholders receive all net earnings of the firm in the form of cash dividends,leaving no funds from earnings available to the firm for expansion (assume that depreciation expense is just equal to the cost of replacing worn-out assets). Construct a pro forma balance sheet for March 31,2011 for an expected level of sales of $75.4 million.Assume current assets and accounts payable vary as a percent of sales,and fixed assets remain at the present level.Use notes payable as discretionary financing.

Pro forma financial statements depict the end result of the planning period's operations.

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?

CraftCo,Inc.' 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.' earnings before interest and taxes for April 2012?

Lindsey Insurance Co.has current sales of $10 million and predicts next year's sales will grow to $14 million.Current assets are $3 million and fixed assets are $4 million.The firm's net profit margin is 7 percent after taxes.Presently,Lindsey has $900,000 in accounts payable,$1.1 million in long-term debt,and $5 million (including $2.5 million in retained earnings)in common equity.Next year,Lindsey projects that current assets will rise in direct proportion to the forecasted sales,and that fixed assets will rise by $500,000.Lindsey also plans to pay dividends of $400,000 to common shareholders. a.What are Lindsey's total financing needs for the upcoming year? b.Given the above information,what are Lindsey's discretionary financing needs?