Question: Problem 8. This and the following two problems demonstrate that pro forma forecasts, cash budgets and cash flow forecasts all yield the same estimated need
Problem 8. 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 dont 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 companys cash balances for the first three months of 2012. Using the information below, construct a monthly cash budget for Pepperton for January 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 is $180,000
Principal payment on debt due in March is $210,000
Interest due in March is $90,000
Dividend payable in March is $300,000
Taxes payable in February is $180,000
Addition to accumulated depreciation in March is $30,000
Cash balance on January 1, 2012 is $300,000
Minimum desired cash balance is $150,000
Problem 9. Continuing problem 8, Peppertons annual income statement and balance sheet for December 31, 2011 appear below. Additional in-formation about the companys accounting methods and the treasurers expectations for the first quarter of 2012 appear in the footnotes.
Pepperton Annual
Income Statement
December 31, 2011 ($ 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
Pepperton
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 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 remainder of 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 Peppertons financial prospects?
d. What do your pro forma income statement and balance sheet tell you about Peppertons 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.
Please note that the questions have been italicized. Problem 8 and parts of problem 9 have been answered, but problem 10 has not been answered (Problem 10 has to do with the construction of a first-quarter 2012 cash flow forecast for Pepperton...)
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