1) Ellis Electronics Company’s actual sales and purchases for April and May are shown here, along with forecasted sales and purchases for June through
September.
Sales Purchases
April (actual)…………………………… $320,000 $130,000
May (actual)……………………………. 300,000 120,000
June (forecast)………………………. 275,000 120,000
July (forecast)………………………… 275,000 180,000
August (forecast)…………………… 290,000 200,000
September (forecast)…………….. 330,000 170,000
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. Ellis pays for 40 percent of its purchases in the month after purchase and 60 percent two months after.
Labour 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.
Ellis Electronics’ ending cash balance in May is $20,000. The minimum desired cash balance is $15,000. 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 $15,000).
(Hint: You will have to create separate line items in your cash budget for Marketable Securities Purchased (Sold) and Cumulative Marketable Securities).
2) The Longbranch Western Wear Company has the following financial statements, which are representative of the company’s historical average.
Income Statement
Sales…………………………………….. $200,000
Expenses……………………………… 158,000
Earnings before interest and taxes 42,000
Interest……………………………….. 2,000
Earnings before taxes………… 40,000
Taxes…………………………………… 20,000
Earnings after taxes……………. $ 20,000
Dividends……………………………. $ 10,000
Balance Sheet
Assets Liabilities and Shareholders’ Equity
Cash………………………… $ 10,000 Accounts payable…………… $ 5,000
Accounts receivable….. 10,000 Accrued wages………………. 1,000
Inventory…………………. 15,000 Accrued taxes………………… 2,000
Current assets…………. 35,000 Current liabilities……………. 8,000
Capital assets……………. 70,000 Notes payable…………………. 7,000
Long-term debt……………….. 15,000
Common stock (at Par) 20,000 20,00
Paid In Capital 5,000
Retained earnings 50,000 50,000
Total assets………………. $105,000 Total Common Equity 75,000
Total liabilities and equity…. $105,000
Longbranch 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 capital assets; instead, it will be done through more efficient asset utilization in the existing stores. The Dividends Payout Ratio remains unchanged and forecasted taxes are $24,400.
Prepare a pro forma income statement and balance sheet with any financing adjustment made to notes payable, i.e. including the external financing needs (the plug). If external financing is not required, excess funds are first used to reduce notes payable with the difference going towards reducing long-term debt.
