This and the following two problems demonstrate that pro forma forecasts, cash budgets, and cash flow forecasts all yield the same estimated need for external financing—provided you don’t make any mistakes. For problems 8, 9, and 10, you may ignore the effect of added borrowing on interest expense.
The treasurer of Pepperton, Inc., a wholesale distributor of household appliances, wants to estimate his company’s cash balances for the first three months of 2012. Using the information in the following chart, construct a monthly cash budget for Pepperton for January 2012 through March 2012. Does it appear from your results that the treasurer should be concerned about investing excess cash or looking for a bank loan?
Pepperton Selected Information | ||
Sales (20 percent for cash, the rest on 30-day credit terms): | ||
2011 Actual |
|
|
October | $360,000 |
|
November | 420,000 |
|
December | 1,200,000 |
|
2012 Projected |
|
|
January | $600,000 |
|
February | 240,000 |
|
March | 240,000 |
|
Purchases (all on 60-day terms): |
|
|
2011 Actual |
|
|
October | $ 510,000 |
|
November | 540,000 |
|
December | 1,200,000 |
|
2012 Projected |
|
|
January | $ 300,000 |
|
February | 120,000 |
|
March | 120,000 |
|
Wages payable monthly |
| $ 180,000 |
Principal payment on debt due in March |
| 210,000 |
Interest due in March |
| 90,000 |
Dividend payable in March |
| 300,000 |
Taxes payable in February |
| 180,000 |
Addition to accumulated depreciation in March |
| 30,000 |
Cash balance on January 1, 2012 |
| $ 300,000 |
Minimum desired cash balance |
| 150,000 |
Problem 9
Continuing problem 8, Pepperton’s annual income statement and balance sheet for December 31, 2011, appear next. Additional information about the company's accounting methods and the treasurer's expectations for the first quarter of 2012 can be seen in the footnotes.
Pepperton Annual Income Statement | |
December 31, 2011 ($ thousands) | |
Net sales | $6,000 |
Cost of goods sold1 | 3,900 |
Gross profits | 2,100 |
Selling and administrative expenses2 | 1,620 |
Interest expense | 90 |
Depreciation3 | 90 |
Net profit before tax | 300 |
Tax (33%) | 99 |
Net profit after tax | $ 201 |
Balance Sheet | |
December 31, 2011 ($ thousands) | |
Assets |
|
Cash | $ 300 |
Accounts receivable | 960 |
Inventory | 1,800 |
Total current assets | 3,060 |
Gross fixed assets | 900 |
Accumulated depreciation | 150 |
Net fixed assets | 750 |
Total assets | $3,810 |
Liabilities |
|
Bank loan | $ 0 |
Accounts payable | 1,740 |
Miscellaneous accruals4 | 60 |
Current portion long-term debt5 | 210 |
Taxes payable | 300 |
Total current liabilities | 2,310 |
Long-term debt | 990 |
Shareholders’ equity | 510 |
Total liabilities and equity | $3,810 |
1 Cost of goods sold consists entirely of items purchased in the first quarter.
2 Selling and administrative expenses consist entirely of wages.
3 Depreciation is at the rate of $30,000 per quarter.
4 Miscellaneous accruals are not expected to change in the first quarter.
5 $210 due March 2012. No payments for the remainder of the year.
a. Use this information and the information in problem 8 to construct a pro forma income statement for the first quarter of 2012 and a pro forma balance sheet for March 31, 2012. What is your estimated external financing need for March 31?
b. Does the March 31, 2012, estimated external financing equal your cash surplus (deficit) for this date from your cash budget in problem 8? Should it?
c. Do your pro forma forecasts tell you more than your cash budget does about Pepperton’s financial prospects?
d. What do your pro forma income statement and balance sheet tell you about Pepperton’s need for external financing on February 28, 2012?
Problem 10
Based on your answer to question 9, construct a first-quarter 2012 cash flow forecast for Pepperton.
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