Chapter 4
Problems
4-6.
Delsing Plumbing Company has beginning inventory of 14,000 units, will sell
50,000 units for the month, and desires to reduce ending inventory to 40 percent
of beginning inventory. How many units should Delsing produce?
Solution:
Delsing Plumbing Company
+ Projected sales .....................
+ Desired ending inventory ...
– Beginning inventory............
Units to be produced ...........
4-13.
50,000 units
5,600 (40% * 14,000)
14,000
41,600
Watt's Lighting Stores made the following sales projections for the next six
months. All sales are credit sales.
March...........................
April .............................
May ..............................
$30,000
36,000
25,000
June.............................
July .............................
August ........................
$34,000
42,000
44,000
Sales in January and February were $33,000 and $32,000, respectively.
Experience has shown that of total sales, 10 percent are uncollectible, 30 percent
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 firm 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?
S-94
Solution:
Watt's Lighting Stores
Cash Receipts Schedule
January
February
March
April
May
June
July
August
$33,000
$32,000
$30,000
$36,000
$25,000
$34,000
$42,000 $44,000
S-106
Sales
Collections
(30% of
current sales)
9,000
10,800
7,500
10,200
12,600
Collections
(40% of
prior month's
12,800
12,000
14,400
10,000
13,600
sales)
Collections
(20% of
sales 2
6,600
6,400
6,000
7,200
5,000
months
earlier)
Total cash
$28,400
$29,200
$27,900
$27,400
$31,200
receipts
Still due (uncollected) in August:
Bad debts: ($30,000 + 36,000 + 25,000 + 34,000 + 42,000 + 44,000) × .1 = (211,000) × .1 = $21,100
To be collected from July sales: ($42,000 × .20) = $8,400
To be collected from August sales: ($44,000 × .60) = $26,400
$21,100 + $8,400 + $26,400 = $55,900 due
Expected to be collected:
$55,900 due – $21,100 bad debts = $34,800
13,200
16,800
6,800
$36,800
4-20.
Archer Electronics Company's actual sales and purchases for April and May are
shown here along with forecasted sales and purchases for June through
September.
April (actual) ........................................
May (actual) .........................................
June (forecast)......................................
July (forecast)
August (forecast)
September (forecast)
Sales
$320,000
300,000
275,000
275,000
290,000
330,000
Purchases
$130,000
120,000
120,000
180,000
200,000
170,000
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 after. Archer 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 $12,000 per month. Interest payments of $30,000 are due in June and
September. A cash dividend of $50,000 is scheduled to be paid in June. Tax
payments of $25,000 are due in June and September. There is a scheduled
capital outlay of $300,000 in September.
Archer Electronics' ending cash balance in May is $20,000. The minimum
desired cash balance is $10,000. 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 $10,000).
S-119
Solution:
Archer Electronics
Cash Receipts Schedule
S-120
Sales
+ Cash Sales (10%)
Credit Sales (90%)
+ Collections (month
after sale) 20%
+ Collections (second
month after sale)
80%
Total Cash Receipts
April
$320,000
32,000
288,000
May
$300,000
30,000
270,000
June
$275,000
27,500
247,500
July
$275,000
27,500
247,500
Aug.
$290,000
29,000
261,000
Sept.
$330,000
33,000
297,000
57,600
54,000
49,500
49,500
52,200
230,400
$311,900
216,000
$293,000
198,000
$276,500
198,000
$283,200
Archer Electronics (continued)
Cash Payments Schedule
S-121
Purchases
Payments (month after
purchase—40%)
Payments (second
month after purchase—
60%)
Labor Expense (10% of
sales)
Overhead
Interest Payments
Cash Dividend
Taxes
Capital Outlay
Total Cash Payments
April
$130,000
May
$120,000
June
$120,000
July
$180,000
Aug.
$200,000
Sept.
$170,000
52,000
48,000
48,000
72,000
80,000
78,000
72,000
72,000
108,000
27,500
12,000
30,000
50,000
25,000
27,500
12,000
29,000
12,000
33,000
12,000
30,000
$270,500
$159,500
$185,000
25,000
30,000
$588,000
Archer Electro nics (continued)
Cash Budget
S-122
Cash Receipts...............................................
Cash Payments .............................................
Net Cash Flow..............................................
Beginning Cash Balance .............................
Cumulative Cash Balance...........................
Monthly Borrowing or (Repayment) .........
Cumulative Loan Balance...........................
Marketable Securities Purchased
(Sold)
Cumulative Marketable Securities.............
Ending Cash Balance ..................................
*Cumulative Marketable Sec. (Aug)
Cumulative Cash Balance (Sept)
Required (ending) Cash Balance
Monthly Borrowing
June
$311,900
270,500
41,400
20,000
61,400
--11,400
11,400
50,000
$236,400
–254,800
–10,000
–$28,400
S-123
July
$293,000
159,500
133,500
50,000
183,500
--133,500
-144,900
50,000
August
September
$276,500 $283,200
185,000
588,000
91,500 (304,800)
50,000
50,000
141,500
(254,800)
-*28,400
-28,400
91,500
--- (236,400)
236,400
-50,000
10,000
4-22.
The Manning Company has the following financial statements, which are
representative of the company's historical average.
Income Statement
Sales ..........................................................................
Expenses....................................................................
Earnings before interest and taxes ............................
Interest.......................................................................
Earnings before taxes................................................
Taxes .........................................................................
Earnings after taxes ...................................................
Dividends ..................................................................
$200,000
158,000
$ 42,000
7,000
$ 35,000
15,000
20,000
$ 6,000
Balance Sheet
Assets
Cash........................... $ 5,000
Accounts receivable ..
40,000
Inventory...................
75,000
Current assets .......... $120,000
Fixed assets ...............
80,000
Total assets ................ $200,000
Liabilities and Stockholders' Equity
Accounts payable .............. $ 25,000
Accrued wages ..................
1,000
Accrued taxes ....................
2,000
Current liabilities ............. $ 28,000
Notes payable ....................
7,000
Long-term debt ..................
15,000
Common stock................... 120,000
Retained earnings ..............
30,000
Total liabilities and
stockholders' equity......... $200,000
The firm 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 store. Among liabilities,
S-124
through more efficient asset utilization in the existing store. Among liabilities,
only current liabilities vary directly with sales.
Using the percent-of-sales method, determine whether the company has external
financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio
must be found from the income statement.)
S-125
Solution:
Manning Company
Profit margin =
Payout ratio =
Earnings after taxe s $20,000
=
= 10%
Sales
$200, 000
Dividends $6, 000
=
= 30%
Earnings
20,000
Change in Sales = 20% × $200,000 = $40,000
Spontaneous Assets = Current Assets = Cash + Acc. Rec. +
Inventory
Spontaneous Liabilities = Acc. Payable + Accr. Wages + Accr.
Taxes
S-126
RNF =
=
Α
(∆S) − L (∆S) − PS2 (1 − D)
S
S
$120,000
($40,000) − $28,000 ($40,000) − .10($240,000)(1 − .30)
$200,000
$200,000
= .60($40,000) − .14($40,000) − .10($240,000)(.70)
= $24,000 − $5,600 − $16,800
RNF = $1,600
The firm needs $1,600 in external funds.
S-127