In this mini-case, both the importance and the techniques of cash flow budgeting are emphasized by focusing on a business with highly seasonal cash flow patterns. The nature of the business is such that students should have a quick intuitive grasp of the issues. The case also requires construction of a pro-forma income statement based on the budget. This exercise requires the student to think about the difference between cash flows and accrual accounting measures.
1. Complete the following table of cash collections for the months of July, August, and September. Use Table 12.1 as a model.
2. Complete the following table of cash outflows for the months of July, August, and September.
3. Complete the following monthly cash flow estimate for the months of July, August, and September. Use Table 12.4 as a model.
4. Your monthly cash flow estimate should show small cash shortage at the end of September. Is this shortage a cause for concern? Based on Midwest’s collection and payment patterns, would you expect a cash deficit or surplus by the end of October? No calculations are required, but briefly explain your prediction.
5. Construct a pro forma income statement for the properties managed by Dennis for the third quarter (July, August, and September). Use Figure 12.4 as a model. Show dollar amounts and percent of revenues. September's expenses include $5,000 for supplies and materials and $16,000 for utilities. The payment on debt includes $105,000 in interest, and $45,000 toward retirement of the principal. Midwest's tax rate is 34%. Remember that the income statement is based on accrual rather than cash flow principles.
6. Does the period July through September fairly represent Midwest’s profitability?