Finansal Yönetim Finance (Eyüp Bastı) Problems - Chapter 4 Chapter 4 Financial Forecasting Regardless of what method is used to forecast the future financial needs of the firm (whether it is pro forma financial statements or the percent-of-sales method), the end product is the determination of the amount of new funds needed to finance the activi­ ties of the fum. For firms that are in highly seasonal businesses, it is particularly important to iden­ tify peaks and slowdowns in the activities of the firm and the associated financial requirements. pro forma income statement 95 cash budget 95 cost of goods sold 98 percent-of-sales method 106 pro forma balance sheet 95 I. What are the basic benefits and purposes of developing pro forma statements and a cash budget? (LOl) 2. Explain how the collections and purchases schedules are related to the borrowing needs of the corporation. (L04) 3. With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold? (L02) 4. Explain the relationship between inventory turnover and purchasing needs. (L02) 5. Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement. (La l) 6. Discuss the advantage and disadvantage of level production schedules in finns with cyclical sales. (L05) 7. What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets? (L03) I. At the end of January, Medical Products Corp. had 625 units in inventory, which had cost $15 to produce. During February, the firm produced 550 units at a cost of $20 per unit. If the firm sold 800 units in February, what was the cost of goods sold? a. Assume FIFO inventory accounting. b. Assume LIFO inventory accounting. Cost of goods sold­ FIFO and LIFO (L02) 2. Eaton Stores has forecast credit sales for the fourth quarter of the year as: September (actual) .. Fourth Quarter October .......... . November ... _ . . . . . .. _ ..... . December . .... . . .•. . .. . . . .. $100,000 $ 70,000 50,000 80,000 List of Tenns Discussion Questions Practice Problems and SoluUons 109 Schedule of cash receipts (L02) 110 Part 2 Financial Analysis and Planning Experience has shown that 30 percent of sales receipts are collected in the month of sale and 60 percent in the following month, and 10 percent are never col­ lected. Prepare a schedule of cash receipts for Eaton Stores covering the fourth quarter (October through December). Solutions 1. a. FIFO Accounting 2. Cost of goods sold on 800 units Old inventory: Quantity (units) ......... . .. . . . . Cost per unit. ............. . . . . Total ... .. ..... . New inventory: Quantity (units) ....... . ....... . Cost per unit. ................ . Total ................... .. . . . Total cost of goods sOld . . b. LIFO Accounting Cost of goods sold on 800 units New inventory: Quantity (units) .. Cost per unit. ............ . Total . ............ •........•. Old inventory: Quantity (units) ..... Cost per unit. ............... . . Total ......................• , Total cost of goods sold .......... . September Sales ....... . ......... $100,000 Collections: (30% of current sales) Collections: (60% of previous month's sales) .............. Total cash receipts ........ 625 $15 175 $20 550 $20 250 $15 October $70,000 21,000 60,000 $81 ,000 $ 9,375 3,500 $12,875 $11,000 3,750 $14,750 November $50,000 15,000 42,000 $57,000 December $80,000 24,000 30,000 $54,000 The lO percent that are never collected does not go into the schedule of cash receipts. Chapter 4 Financial Forecasting r"'1'· All ProIIIans are aval&able I n Ho ..... ork Manager. Please see the preface for more InIonnatIon. ~ I. 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 tbe bank and is bragging about the Jaguar and luxury townhouse he will buy. Does his opti­ mistic outlook for his casb 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. 2. In problem I 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 I and 2 illustrate? 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 econ­ omy. The probabiJjty of eacb outcome is indicated. What is the expected value of tbe total sales projection? Outcome Probability Units Price A 0.20 100 $20 B 0.50 180 25 C 0.30 210 30 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 prob­ ability of each outcome is indicated. What is tbe expected value of the total sales projection? Outcome A B C Probability 0.30 0.50 0.20 Units 200 320 410 Price $15 30 40 5. ER Medical Supplies bad 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? 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 witb a 10 percent price increase. Returned merchandise will represent 6 percent of total sales. What is your net dollar sales projection for this year? 7. Sales for Ross Pro's Sports Equipment are expected to be 4,800 units for the coming month. The company likes to maintain I ° 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? Problems Growth and financing (L04) Growth and financing (L04) Sales projection (L02) Sales projection (L02) Sales projection (L02) Sales projection (L02) Production requirements (L02) 111 112 Production requirements (L02) Production requirements (L02) Cost of goods sold- FIFO (LOZ) Cost of goods sold-FIFO (L02) Cost of goods sold­ LIFO and FIFO (LOZ) Gross profit and ending inventory (LOZ) Gross profit and ending inventory (L02) Gross profit and ending inventory (L02) Part 2 Financial Analysis and Planning 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? 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? 10. On December 31 of last year, Barton Air Filters had in inventory 600 units of its product, which costs $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)? 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 inven­ tory accounting)? 12. At the end of January, Lemon Auto Parts had an inventory of 825 units, wh.ich 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. 13. Convex Mechanical Supplies produces a product with the following costs as of July 1,2009. Material ..... . Labor. Overhead . ... $ 6 4 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? 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? IS. Jerrico Wallboard Co. had a beginning inventory of 7,000 units on January I, 2008. Chapter 4 Financial Forecasting The costs associated with the inventory were: Material. Labor Overhead $9.00 unit 5.00 unit 4.10 unit During 2004, Jerrico produced 28,500 units with the following costs: Material . . . .. . Labor Overhead .. . . $11.50 unit 4.80 unit 6.20 unit Sales for the year were 31,500 units at $29.60 each. Jerrico uses LIFO account­ ing. What was the gross profit? What was the value of ending inventory? 16. J. La's Clothiers has forecast credit sales for the fourth quarter of the year as: September (actual) . October . .. November December. Fourth Quarter $70,000 $60,000 55,000 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. La's Clothiers covering the fourth quarter (October through December). . 17. Victoria's Apparel has forecast credit sales for the fourth quarter of the year as: September (actual) . .. Fourth Quarter October . .. . . November . . . . December. $50,000 $40,000 35,000 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). 18. Pirate Video Company has made the following sales projections for the next six months. All sales are credit sales. March April May $24,000 30,000 18,000 June July August $28.000 35,000 38,000 113 Schedule of cash receipts (L02) Schedule of cash receipts (L02) Schedule of cash receipts (L02) 114 Schedule of cash payments (L02) Schedule of cash payments (L02) Part 2 Financial AfUliysis and Planning Sales in January and February were $27,000 and $26,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 30 per­ cent 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 fum 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? 19. The Elliot Corporation has forecast the following sales for the first seven months of the year: January February March April $12,000 16,000 18,000 24,000 May June July $12,000 20,000 22,000 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's 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.) 20. Wright Lighting Fixtures forecasts its sales 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. Complete a production schedule and a summary of cash payments for March, April, and May. Remember that production in anyone month is equal to sales plus desired ending inventory minus beginning inventory. Chapter 4 Financial Forecasting 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 k~eps an ending inventory equal to 120 percent of the next month's expected sales. The ending inventory for December (January's begin­ ning 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 pay­ ments for January through June. Dina's produced 800 units in December. Z': 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. Experi­ ence 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 col­ lections for November and December. Also assume Graham's cash payments for November anci 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.) 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: November December Actual $120,000 140,000 January February Forecast $190,000 210,000 March 230,000 Additional Information April forecast $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 115 Schedule of cash payments (L02) Cash budget (L02) Complete cash budget (L02) 116 Complete cash budget (L02) Percent-of-sales method (L03) Part 2 Financial Analysis and Planning 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. ~ 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 and 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). 25. Carter Paint Company has plants in nine midwestern states. Sales for last year were $ I 00 million, and the balance sheet at year-end is similar in percent­ age 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. Chapter 4 Financial Forecasting BALANCE SHEET (in $ millions) Assets Liabilities and Stockholders' Equity Cash ..... . $ 5 Accounts payable $15 Accounts receivable ......... . •. . Inventory ................ . . . •. Current assets . Fixed assets ... .... ~ ........ . • Total assets . . .... .. . .. . 15 30 50 40 $90 Accrued wages ... Accrued taxes ... ......•.... . Current liabilities ... Notes payable . Common stock .... Retained earnings. Total liabilities and stockholders' equity. 6 4 25 30 15 20 $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,) ~ 26. Jordan Aluminum Supplies has the following financial statements, which are representative of the company's historical average. Income Statement Sales ..... ............... ............. . Expenses ......... . Earnings before interest and taxes ..... . . ... . . . T ••• • • Interest. .. . ... .. ............ . .... .. .. . . . . .• • . . . . Earnings before taxes . Taxes . ............ . Earnings after taxes .. . Dividends .......... . Balance Sheet $300,000 247,000 $ 53,000 3,000 $ 50,000 20 ,000 $ 30,000 $ 18,000 Assets Liabilities and Stockholders' Equity Cash .... . .... . Accounts receivable ...... . Inventory .. ............. . Current assets . ... . .. . Fixed assets ........ . ... . $ 8,000 20,000 62,000 $ 90,000 100,000 Total assets. . . . . . . . . . . . . . $190,000 Accounts payable. . . . . . . . . . $ 6,000 Accrued wages. Accrued taxes .. . Current liabilities .. . ..... . . Notes payable . Long-term debt. .... . . . . Common stock . .. . . . Retained earnings . .. .. .... . Total liabilities and stockholders' equity . ..... . 2,000 4,000 $ 12,000 10,000 20,000 80 ,000 68,000 $190,000 Percent-of-sales method (L03) 117 Percent-of-sales method (L03) Landis Corporation (External funds req uirement) (L04) Part 2 Financial Analysis and Planning 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, detennine whether Jordan Aluminum has external financing needs. (Hint: A profit margin and payout ratio must be found from the income statement.) 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. Assets Balance Sheet End of Year (In $ millions) Liabilities and Stockholders' Equity Cash .... . $ 10 Accounts payable . . $ 15 Accounts receivable .. Inventory ......... . Plant and equipment . ......... . 15 50 75 Accrued expenses. Other payables ....... • . Common stock . .... Retained earnings . ......... . . . Total liabilities and 5 40 30 60 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 finn. (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. The Landis Corporation had 2008 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows: Jntis included fixed assets as the frrm is at full capacity.