Financial Management Chapter 4 Case After performing the ratio analysis, develop
ID: 2655706 • Letter: F
Question
Financial Management
Chapter 4 Case
After performing the ratio analysis, developing common-size financial statements, and examining return on equity by the DuPont method, Warren Lynch presented his findings and recommendations for CompU to Bill Jobs. Warren stated that the large decrease in cash and the use of short-term debt concerned him, and recommended doing cash and profit planning in order to make sound financing and expansion decisions. He also pointed out that the cost of goods sold was increasing and needed further analysis. Bill agreed, and thanked Warren for his hard work. Bill said he would talk to their suppliers and determine what was driving the increased costs while Warren started the cash and profit planning process. Warren said he first needed to put together the cash flow statement to see what was causing the decrease in cash, and then develop cash budgets and pro forma financial statements to forecast future profits and financing required.
Using the financial statements below, create CompU’s cash flow statement for 2009 and determine what caused the decrease in cash from 2008.
Using the information given, develop cash budgets for the first three months of 2010, including schedules of cash receipts and disbursements. In which months will financing be required?
Use the additional data to prepare the pro forma income statement and balance sheet for 2010. How much additional financing will CompU need?
Information for cash budgets:
Monthly forecasted sales and purchases:
Year Month Sales Forecast Purchases
2009 November $130,000 (actual) $ 98,000 (actual)
December 120,000 (actual) 90,000 (actual)
2010 January 155,000 116,000
February 140,000 105,000
March 140,000 105,000
April 140,000 105,000
May 125,000 90,000
June 100,000 70,000
July 100,000 70,000
August 165,000 115,000
September 165,000 115,000
October 160,000 112,000
November 160,000 112,000
December 150,000 105,000
Total $1,700,000 $1,220,000
CompU makes 20% of all sales for cash, collects 50% in the next month, and collects 30% in the second month following the sale.
The firm pays for 40% of its purchases in month they are made, and the remaining 60% are paid for in the month after.
Other cash inflows are expected to be $10,000 in February.
Wages and salaries are 10% of the previous month’s sales.
Rent, utilities, and other miscellaneous expenses total $4,000 per month.
Interest payments of $10,000 as well as a principal payment of $20,000 must be paid in March, June, September, and December.
Taxes of $10,000 are due in January, $15,000 in April, and $20,000 in July, and $30,000 in October.
Warren decides that a minimum cash balance of $25,000 should be maintained.
Dividends of $2,500 will be paid in March, June, September, and December.
Additional information for pro forma financial statements:
Cash on the balance sheet will equal the minimum cash balance Warren wants maintained.
Additional fixed assets of $320,000 will be purchased in 2010.
Warren wants to issue long-term debt of $175,000 and use the proceeds to pay down notes payable.
Accounts receivable, inventory, accounts payable, and accruals will change in direct response to the change in sales.
Common stock will remain unchanged.
The cost of goods sold includes $10,000 of fixed costs each month.
Depreciation expense will equal $75,000 for 2010.
Interest expense equals the quarterly interest payments.
CompU’s tax rate is 40%.
CompU, Inc.
Comparative Balance Sheets
December 31, 2008 December 31, 2009
Cash $ 50,000 $ 10,000
Accounts Receivable 100,000 120,000
Inventory 150,000 150,000
Total Current Assets $ 300,000 $ 280,000
Fixed Assets 1,200,000 1,480,000
Less: Accumulated Depreciation (500,000) (560,000)
Total Fixed Assets $ 700,000 $ 920,000
Total Assets $1,000,000 $1,200,000
Liabilities and Stockholders’ Equity
Accounts Payable $ 40,000 $ 42,000
Accruals 20,000 24,000
Notes Payable 50,000 224,000
Total Current Liabilities $ 110,000 $ 290,000
Long-term debt 200,000 200,000
Common Stock 200,000 200,000
Retained Earnings 490,000 510,000
Total Liabilities and Stockholders’ Equity $1,000,000 $1,200,000
CompU, Inc.
Income Sheets
December 31, 2008 December 31, 2009
Sales $1,000,000 $1,200,000
Cost of Goods Sold 675,000 900,000
Gross Profit 325,000 300,000
Operating Expenses:
S, G, & A 100,000 114,000
Depreciation 50,000 60,000
Total Operating Expenses 150,000 174,000
Operating Profit 175,000 126,000
Interest Expense 25,000 39,000
Net income before taxes 150,000 87,000
Taxes 60,000 34,800
Net income after taxes 90,000 52,200
Explanation / Answer
10,000.00
Cash Budget For the Month of JAN FEB & MAR
Particulars
November
December
January
February
March
Sales
1,30,000
120000
155000
140000
140000
Purchase
98,000
90000
116000
105000
105000
COLLECTIONS
Cash Collection
26000
24000
31000
28000
28000
50% collection Next Month
65000
60000
77500
70000
30% in the second month
39000
36000
46500
Other cash inflows
10,000
Total collections
26000
89000
130000
151500
144500
DISBURSEMENTS
For merchandise purchases(40%)
39200
36000
46400
42000
42000
For merchandise purchases(60%)Next Month
54000
69600
63000
Interest & Principal payments
30000
Rent, utilities, and other miscellaneous expenses
4000
4000
4000
Wages and salaries are 10% of the previous month’s sales.
12000
15500
14000
Dividends
2500
Taxes
10000
Total DISBURSEMENTS
39200
36000
126400
131100
155500
Net cash receipts and disbursements
-13200
53000
3600
20400
-11000
Excess (deficiency) of cash
beginning cash balance
10000
25000
45400
Min cash balance always desired (25000)
25000
25000
25000
25000
Available cash balance
-15000
0
20400
Excess (deficiency) of cash
-11400
20400
9400
Short Term Finance Required
11400
Ending cash balance
25000
45400
34400
Statement of Cash Flows Net Operating Income Before Tax 87,000 Add: Depreciation Being Non-Cash Expense 60000 Less Income Tax Paid -34800 Cash flow from Operating activities Before Working capital changes 1,12,200 Less: Increase in Accounts receivable -20000 Less: Increase in inventory 0 Add: Increase in accounts payable 2000 Add: Increase in Accruals 4000 -14000 Cash flow from Operating activities 98,200 Purchase of PPE -280000 Cash used in Investing Activities -280000 Increase Notes Payable 174000 Cash dividend -32200 Cash used in Financing activities 141800 Net increase in cash and cash Equivalents -40,000 Opening Cash balance 50000 Closing Cash Balance10,000.00
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