Problem 2-12 Cash Flow Franklin Co., a specialty retailer, has a history of payi

Question

Problem 2-12
Cash Flow

Franklin Co., a specialty retailer, has a history of paying quarterly dividends of $0.50 per share. Management is trying to determine whether the company will have adequate cash on December 31, 2013, to pay a dividend if one is declared by the board of directors. The following additional information is available:

Required:

Determine the cash that Franklin will have available to pay a dividend on December 31, 2013. Round all amounts to the nearest dollar.
$

What can Franklin's management do to increase the cash available?

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Should management recommend that the board of directors declare a dividend? Explain.

Cash Flow Franklin Co., a specialty retailer, has a history of paying quarterly dividends of $0.50 per share. Management is trying to determine whether the company will have adequate cash on December 31, 2013, to pay a dividend if one is declared by the board of directors. The following additional information is available: All sales are on account, and accounts receivable are collected one month after the sale. Sales volume has been increasing 5% each month. All purchases of merchandise are on account, and accounts payable are paid one month after the purchase. Cost of sales is 40% of the sales price. Inventory levels are maintained at $75,000. Operating expenses in addition to the mortgage are paid in cash. They amount to $3,000 per month and are paid as they are incurred.

Explanation / Answer

Answers:-

Accounts Receivable
October
$12,500 collected from September sales
October sales = 12,500 x 1.05 = $13,125
November
$13,125 collected from October sales
November sales = 13,125 x 1.05 = $13,781 (rounded)
December
$13,781 collected from November sales

December sales=13781*1.05 = 14470.05
Total cash received from sales = 12,500 + 13,125 + 13,781 = $39,406

Notes Receivable 10,000 x 1.05 = $10,500 cash collected

Accounts Payable
October
$5,000 paid for September purchases.
October Purchases = 13,125 x 40% = $5,250
November
$5,250 paid for October purchases
November Purchases = 13,781 x 40% = $5,512
December
$5,512 paid for November purchases
Total cash paid for purchases = 5,000 + 5,250 + 5,512 = $15,762

Cash paid for expenses
$3,000 x 3 = $9,000

Cash paid for mortgage payments
1,200 x 3 = $3,600

Cash Flow Summary
5,000 beginning cash balance
+ 39,406 collected from A/R
+ 10,500 collected from notes receivable
- 15,762 paid for A/P
- 9,000 paid for expenses
- 3,600 paid for mortgage payments
= $26,544 available for dividends

Therefore if Dividend of $1 per share is declared company will not have sufficient fund in hand.

Part B-

He can try to increase the sale New customer acquisition is essential to a growing business, but it can take time and money to convert prospects into sales. One option to increasing cash flow is to offer customers discounts if they pay early.

Part C-

Should management recommend that the board of directors declare a dividend? Explain.

There is no sufficient cash is available for dividends. Management should not recommend the board of directors to declare a dividend

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