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INSTRUCTIONS AND HELPFUL HINTS
1. Work the income statements.
2. Compute the cash flow statement.
a. Remember that you start at the beginning of April with the cash balance as of the end of
March and that is indicated on the balance sheet. You add your collections from accounts
receivable which I showed you how to do that with 30% of cash sales in the month of sale
less the two percent discount for paying early, 60% collected in the month after the month of
sale and 8% collected in the second month after the month of sale. In other words, you
collect 30% of April sales minus the 2% discount in the month of April, 60% of March sales
collected in the month of April and 8% of February sales in the month of April. Each of the
next five months cash inflow is computed the same way.
b. I also indicated how to compute the cash outflow each month. Some of the payments are
made in the month in which the expense is incurred, some of the expenses are paid half in the
month in which the expense is incurred and some are paid in full one month after they are
incurred. Income taxes for the first quarter are paid in April and Income taxes for the second
quarter are paid in July. Property taxes are paid in April and July. The interest expense on
the debt will be paid quarterly so that first quarter interest as shown on the March 31st balance
sheet will be paid in April and second quarter interest will be paid in July and third quarter
interest will appear as interest payable on the Sept 30 balance sheet.
c. Add the cash inflow to the beginning cash balance and then subtract the cash outflows to
determine the cash position at the end of the month. With correct figures, you will notice that
you have a deficit cash balance at the end of the April so that you must add an AFN including
enough to bring the beginning balance for May to between $4,000 and $5,000. AFN is
defined as ADDITIONAL FUNDS NEEDED AND YOU SHOULD REMEMBER THAT
TERM FROM MANAGERIAL FINANCE. IF YOU DO NOT, THEN YOU NEED TO
REVIEW THE TERM FROM YOUR MANAGERIAL FINANCE TEXT. REMEMBER,
THIS COURSE IS A CAPSTONE COURSE AND RELIES HEAVILY ON WHAT YOU
HAVE LEARNED IN PREVIOUS COURSE. There is a line of credit at the bank for
$20,000 and if you work the correct numbers, you will see that you need more financing than
what the Rogers County Bank’s line of credit will provide you.
3. When computing the balance sheet, your cash balance at the end of September will be the ending
cash balance on your cash budget assuming that you arrange for the needed financing.(AFN)
a. The Gross Accounts receivable balance as of September 30 will be 70% of Sept sales, 10%
of August sales and 2% of July sales. Then you will subtract 2% of all nine months sales to
arrive at Net Accounts Receivable
b. Inventory on the balance sheet as of Sept 30 will be the ending inventory on your third
quarter income statement plus the safety stock. (you will have started April with 20,000 units
of finished inventory at $2.10 a unit and during the six month of your problem, the forecast is
that you will produce 510,000 units and sell 320,000 units, so you will add 190.000 units to
the 20,000 you started in April.
c. Prepaid Insurance is not a cash expense as it has already been paid so it will not be in your
cash budget but it is an expense, so prepaid insurance will be reduced by 300 a quarter or a
total of $600 from the March 31st balance.
d. Depreciation is also not a cash expense so it is not in your cash budget but it is an expense of
$3,000 a quarter for a total of $6,000 for the six months so that Allowance for Depreciation
will be $9,000 at the end of September.
e. All of the expenses that were incurred that were paid in the month in which they were
incurred will not show up on the balance sheet. However, all expenses that were half paid in
month of Sept in which they were incurred will show as a liability as of Sept 30 for the half
that was not paid. Also any expense that was incurred in Sept but was not paid will be a
liability on the Sept 30 balance sheet.
f. Income taxes incurred for third quarter will be a liability as of Sept 30.
g. The profits earned in second quarter and third quarter will be added to retained earnings to
compute the retained earnings balance as of Sept 3oth. (There are no dividends being paid as
this company is short on cash to grow on.
h. The AFN will be entered on the liability and equity side of the balance sheet in order for your
balance sheet to balance.
When finished with the computations, you will have three income statements and two
balance sheets. You must conduct a complete financial analysis of the company as to its
financing problem and whether the company is in good enough financial shape to obtain the
AFN needed. At the end of your financial analysis should be your recommendation as to
the solution to the company’s cash problem. (REMEMBER THAT THIS IS A FORECAST
AND YOU ARE THE BANKER ADVISING YOUR CLIENT.)