Foundations of Financial Managem Block, Hirt, Danielson and Short -- Eleventh Canadian Ed Problem 4-37 Comprehensive Problem - Cash Budget and Proforma Statements Student Name: Course Name: Student ID: Course Number: Toys for You, a manufacturing company, has been growing quickly but has found that its financial situation is continually under pressure. Production has fluctuated to meet demand in an attempt to provide first-class service, resulting in larger inventory positions. Also, the collection of accounts has worsened to approximately 60 days, which is well above the terms of 30 days. To address the finanical concerns, Toys for You has proposed level production and an effort by the credit department to bring the average collection period down to 35 days. Estimated sales for the upcoming months are: July August September $1.957.500 2.070.000 2.205.000 October November December 2.362.500 2.475.000 2.565.000 Sales for May were $1,732,500 and will be approximately $1,845,000 for the current month of June. It is projected that the current collection period of 60 days will be reduces to 50 days for July and August, 42 days for September and October, and will meet the target of 35 days in November and December. Purchases are forecast to be $585,000 a month beginning in July. In May they were $675,000 and in June they are expected to be $607,500. The purchases are paid in 40 days. Materials used per month beginning in July will be $744,000. Labour expense will be paid when incurred and are expected to be $195,000 a month. Other expenses of manufacturing will also be paid as incurred and are expected to be $375,000 a month. Cost of goods sold has regularly been 70 percent of sales. Amortization is $38,000 per month. Selling and administrative expenses are expected to be 13 percent of sales. The tax rate is 42 percent. There will be payments on notes of $675,000 in each of August and November. Interest of $270,000 and income taxes of $338,000 are both due in October. Dividends of $22,500 are payable in July and October. TOYS FOR YOU Balance Sheet (estimated) June 30, 20XY ($ thousands) Assets Current assets: Cash Accounts receivable Inventory Total current assets Capital assets: Plant and equipment Less: Accumulated amortization Total assets Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable Accrued liabilities Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and shareholders' equity $666 3.578 8.231 12.475 11.273 4.784 6.489 $18.964 $945 3.700 2.596 7.241 4.725 4.500 2.498 $18.964 REQUIREMENTS 1 Using the information above, prepare proforma statements for Toys for You for the three months ending September and December 20XY. 2 Construct a cash budget for the six-month period and identify any need for short term Financing 3 There are no changes in accounts not mentioned above. Assume capital assets are sufficient for increased sales. CHECK FIGURES TOTAL PAYMENTS DECEMBER 31 $ 1.488.500 TOTAL ASSETS DECEMBER 31 $ 18.998.000 Solution Prepare cash payment, inventory and cash receipt information first. Then prepare the proforma income statement and the proforma balance sheet. Toys for You in thousands CASH PAYMENTS SCHEDULE May June July August May June July August Purchases Payment Accounts payable Labour Selling & admin. Other Note payable Interest Taxes Dividends Total payments Cost of goods produced Cost of goods sold Inventory CASH RECEIPTS SCHEDULE Sales Collections 60 days 50 days 42 days 35 days Total collections Accounts receivable Receipts less payments Net receipts Accumulated cash Toys for You Proforma Income Statement September Sales Cost of goods sold Gross profit Selling & admin. Amortization Operating Profit Interest Profit before taxes Taxes (42%) Net income Dividends To retained earnings Toys for You Proforma Balance Sheet Assets June 30 Current assets Cash Accounts receivable Inventory Total current assets Capital assets Plant & equipment Accum. Amort. Net capital assets Total assets Liabilities and Shareholders' Equity Current liabilities Accounts payable Notes payable Accrued liabilities Accrued taxes Total current liabilities Sept 30 Long term debt Common stock Retained earnings Total liabilities and shareholders' equity Sept. October Nov. Dec. Sept. October Nov. Dec. December Dec 31 BUAD 195 CH 4 - BUDGET CASE GRADES This is the marking scheme for the MASTER BUDGET: Available Earned File uploaded on time 5 Cash receipts schedule Purchases schedule Cash payments schedule Cash budget with loan Income statement Ret. earnings statement Balance sheet Paragraph Formulas Format Total Late deduction Bonus 5 - early submission Total 5 5 5 5 10 5 10 10 15 10 85 0 85 0
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