Chapt

er4

Di
scussi
onQuest
ions
4-
1. Whataret
hebasi
cbenef
it
sandpur
posesofdev
elopi
ngpr
ofor
ma
st
atement
sandacashbudget
?

Thepr o-formaf i
nancialstatementsandcashbudgetenabl ethef i
rmto
determinei t
sf ut
urelevelofassetneedsandt heassoci
atedfinanci
ng
thatwillber equi
red.Furthermor e,
onecant r
ackactualevent
sagai nstt
he
project
ions.Banker sandot herlendersalsousethesefi
nancial
statement sasagui deincr editdecisi
ons.

4-
2. Expl
ainhowthecoll
ecti
onsandpurchasesschedul
esar
erel
atedt
othe
borr
owingneedsofthecorpor
ati
on.

Thecollect
ionsandpurchaseschedulesmeasurethespeedatwhich
recei
vablesarecol
lect
edandpur chasesarepai
d.Totheextent
coll
ecti
onsdonotcov erpurchasi
ngcostsandotherfi
nanci
al
requi
rements,thef
irm mustlooktoborrowi
ngtocoverthedefi
cit
.

4-
3. Wi
thinf
lat
ion,
whataretheimpli
cat
ionsofusi
ngLIFOandFI
FOi
nvent
ory
met
hods?Howdot heyaffectt
hecostofgoodssold?

LIFOinventoryv
aluat
ionassumest hel
atestpurchasedinv
entory
becomespar tofthecostofgoodssold,whil
etheFI FOmethodassigns
i
nv entor
yitemsthatwerepurchasedfi
rstt
ot hecostofgoodssold.Inan
i
nf l
ati
onaryenvi
ronment,theLIFOmethodwillresul
tinahighercostof
goodssol dfi
gureandonet hatmoreaccurat
elymat chest
hesalesdoll
ars
recordedatcurr
entdoll
ars.

4-
4. Expl
ainther
elat
ionshi
pbet
weeni
nvent
oryt
urnov
erandpur
chasi
ng
needs.

Themor erapidthet ur
nov erofi nventory
, t
hegr eatert
heneedfor
purchaseandr eplacement .Rapi dl
yturni
ngi nventorymakesfor
somewhatgr eatereasei nf oreseeingfuturerequirement
sandreduces
thecostofcarryinginventor y
.

S-
94
 Rapidcor
por
ategrowt
hinsal
esandpr
ofi
tscancausef
inanci
ng
4-
5. probl
ems.El
abor
ateonthi
sstat
ement
.

Rapidgrowthinsal
esandpr ofi
tsisoft
enassoci at
edwit
hr apidgrowthin
assetcommi t
ment.A$100,000i ncr
easeinsalesmayoccasi ona
$50,000incr
easeinasset
s,withperhapsonl y$10,
000ofthenew
fi
nancingcomingfrom pr
ofi
ts.Itisver
yseldom thati
ncr
ement alprof
its
fr
om salesexpansi
oncanmeetnewf i
nancingneeds.

4-
6. Di
scusst
headvant
ageanddisadv
ant
ageofl
evel
product
ionschedul
es
i
nfi
rmswithcy
cli
calsal
es.

Levelproduct i
oni nacy cl
icalindustr
yhast headv antageofal l
owingfor
themai ntenanceofast ablewor kforceandreduci ngineffi
cienci
es
causedbyshut tingdownpr oducti
ondur i
ngslowper iodsand
accel
eratingwor kduringcrashpr oducti
onperiods.Amaj ordrawbackis
thatalargest ockofi nventorymaybeaccumul ateddur ingtheslowsales
peri
od.Thi sinventorymaybeexpensi v
etof i
nance, withanassociated
dangerofobsol escence.

4-
7. Whatcondi
ti
onswoul
dhelpmakeapercent-
of-
sal
esf
orecastal
mostas
accur
ateasprof
ormafi
nanci
alst
atement
sandcashbudgets?

Thepercent-of
-salesforecastisonlyasgoodast hefunctional
rel
ati
onshipofasset sandl i
abil
it
iestosales.Totheextentthatpast
rel
ati
onshipsaccur at
elydepictthefutur
e,theper
cent-of-
salesmet hod
will
givevaluesthatreasonablyrepresenttheval
uesder i
vedthroughthe
pro-f
ormast at
ement sandt hecashbudget .

S-
95
Pr
obl
ems
4-
1. Phil
ipMor ri
sisv eryexci
tedbecausesal esf orhisclot
hingcompanywas
expect edt odoubl ef r
om $500,000t o$1,000,000nexty ear .Phili
pnotes
thatnetasset s(asset s–li
abil
iti
es)willr
emai nat50per centofsal es.
Hiscl othingf i
rm wi l
lenj
oya9per centr
et urnont ot
alsales.Hewi l
lst
art
they earwi t
h$100, 000inthebankandi sbr aggi
ngaboutt het wo
Mer cedeshewi l
l buyandtheEur opeanv acationhewi l
ltake.Doeshi s
opti
mi sti
cout lookf orhi
scashposi ti
onappeart obecor rect?Comput e
hislikelycashbal anceordefi
citfortheendoft heyear.St artwi t
h
beginni ngcashandsubt r
acttheassetbui ldup(equalto50per centof
thesal esi ncrease)andaddi nprof i
t.

Sol
uti
on:
Phi
l
ipMor
ri
s

Begi
nningcash $100,
000
–Assetbuil
dup (250,
000)(1/
2*$500,000)
Prof
it 90,
000 (9%*$1,000,
000)
Endi
ngcash ($60,
000)Defi
cit

4-
2. I
nprobl
em 1ifther
ehadbeennoincreaseinsalesandal
lot
herfact
s
wer
ethesame, whatwoul
dhisendi
ngcashbal ancebe?Whatl
essondo
t
heexamplesinprobl
emsoneandtwoi ll
ust
rate?

Sol
uti
on:
Phi
l
ipMor
ri
s(cont
inued)

Beginni
ngcash $100,
000
Noasset -
--
--
buil
dup
Profi
t 45,
000 (
9%*$500,
000)
Endingcash $145,
000

Thelessontobelearnedist
hatincr
easedsalescan
i
ncreasethefi
nancingrequi
rementsandreducecash
evenforaprof
it
ablefirm.

S-
96
S-
97
4-
3. TheAlli
anceCor p.expectstosel
lthefol
lowingnumberofunitsof
coppercablesatthepricesindi
catedunderthr
eediff
erencescenar
iosin
theeconomy .Theprobabili
tyofeachoutcomeisindi
cated.Whatisthe
expect
edv alueofthetotalsal
espr oj
ect
ion?

Out
come Pr
obabi
l
ity Uni
ts Pr
ice
A 0.
30 200 $15
B 0.
50 320 $30
C 0.
20 410 $40

Sol
uti
on:
Al
l
ianceCor
por
ati
on

(
1) (
2) (
3) (
4) (
5) (
6)
Expected
Total Value
Out
come Pr
obabil
i
ty Uni
ts Pr ice Val ue (2*5)
A .30 200 $15 3,
000 900
B .50 320 $30 9,
600 4,800
C .20 410 $40 16, 400 3,280
Tot
alexpectedv
alues $8,980

4-
4. SalesforWester
nBootSt oresar
eexpectedt
obe40, 000unitsfor
October.Thecompanyli
kest omaintai
n15percentofunitssal
esf or
eachmont hinendingi
nventory(
i.
e.,
theendofOctober).Begi
nning
i
nventoryforOct
oberis8,500unit
s.Howmanyuni tsshouldWest ern
Bootproduceforthecomingmont h?

Sol
uti
on:
West
ernBootSt
ores

+ Proj
ectedsales 40,
000 unit
s
+ Desiredendi
nginvent
ory 6,000 (15%*40,
000)
– Beginningi
nventor
y 8,
500
Unit
st obeproduced 37,
500

S-
98
4-
5. Vit
aleHai
rSprayhadsalesof8,000unit
sinMar ch.A50per cent
i
ncreasei
sexpectedinApri
l.Thecompanywi llmaint
ainfi
veper centof
expect
eduni
tsalesforApri
linendi
nginventory.Begi
nningi
nv entoryfor
Apri
lwas400units.Howmanyuni tsshoul
dt hecompanypr oducei n
Apri
l?

Sol
uti
on:
Vi
tal
eHai
rSpr
ay

+ Pr
oject
edsal
es 12,
00 uni
ts(
8,000*1.50)
0
+ Desi
redending 600 (5%*12,000)
i
nventory
– Begi
nninginvent
ory
400
Uni
tst
obepr
oduced 12,
20
0
4-
6. DelsingPlumbingCompanyhasbeginni
nginvent
oryof14,000unit
s,wil
l
sell50,000uni
tsfort
hemonth,anddesi
restoreduceendinginv
entor
yto
40per centofbegi
nni
nginv
entory.HowmanyunitsshouldDelsi
ng
produce?

Sol
uti
on:
Del
singPl
umbi
ngCompany

+ Proj
ectedsales 50,
000 unit
s
+ Desiredendi
nginvent
ory 5,600 (40%*14,
000)
– Beginningi
nventor
y 14,
000
Unit
st obeproduced 41,
600

S-
99
4-
7. OnDecember31ofl astyear,
Wol f
sonCorporat
ionhadi ninv
entor
y400
unit
sofit
sproduct,
whi chcost$21perunitt
opr oduce.Duri
ngJanuary
,
thecompanyproduced800uni t
satacostof$24peruni t
.Assuming
thatWol
fsonCorporat
ionsold700unit
sinJanuar y,whatwasthecostof
goodssold(
assumeFI FOinventor
yaccounti
ng)?

Sol
uti
on:
Wol
fsonCor
por
ati
on

Costofgoodssol
don700uni
ts

Oldinv
entory:
Quanti
ty(Uni
ts) 400
Costperunit $ 21
Total $8,
400

Newi nvent
ory
:
Quanti
ty(Uni
ts) 300
Costperunit $ 24
Total $7,200
TotalCostofGoodsSol
d $15,
600

S-
100
4-
8. AttheendofJanuar y
,Higgi
nsDataSystemshadani nventor
yof600
unit
swhi chcost$16peruni
ttoproduce.Duri
ngFebruarythecompany
produced850unitsatacostof$19perunit.I
fthefi
rm sold1,100uni
ts
i
nFebr uary,
whatwasi t
scostofgoodssold?(AssumeLI FOinvent
ory
accounti
ng.)

Sol
uti
on:
Hi
ggi
nsDat
aSy
stem

Costofgoodssol
don1,
100uni
ts

Newi nv
entory
:
Quanti
ty(Uni
ts) 850
Costperunit $ 19
Total $16,
150

Oldinventory:
Quantit
y( Uni
ts) 250
Costperuni t $ 16
Total $4,000
TotalCostofGoodsSol
d $20,
150

4-
9. TheBradl
eyCorpor
ati
onpr
oducesapr
oductwi
tht
hef
oll
owi
ngcost
sas
ofJul
y1,2001:

Materi
al........$2peruni
t
Labor.......... 4peruni
t
Overhead....... 2peruni
t

Begi
nni
nginventor
yatt hesecostsonJuly1was3, 000uni
ts.From July
1toDecember31, 2001,Bradleypr
oduced12,000unit
s.Theseuni t
shad
amateri
alcostof$3,laborof$5,andoverheadof$3perunit.Bradley
usesFI
FOinventor
yaccount ing.

AssumingthatBradl
eysold13,
000unit
sduri
ngthel
astsi
xmonthsof
theyearat$16each,whatist
hei
rgrosspr
ofi
t?Whati
stheval
ueof
endi
nginventor
y?

S-
101
 Sol
uti
on:
Br
adl
eyCor
por
ati
on

Sales(
13,000@ $208,
000
$16)
Costofgoodssold:
Oldinv
entory:
Quanti
ty(uni
ts) 3,
000
Costperunit $
8
Total $24,
000
Newinventory
:
Quanti
ty(uni
ts) 10,
000
Costperunit $ 11
Total $110,
00
0
Totalcostofgoods
sold $134,
000
Grossprofi
t $74,000

Valueofendi ng
i
nv entor y:
Beginningi nventor
y
(3,
000*$8) $24,
000
+ Total product ion
(12,000*$11) $132,
00
0
Total i
nv ent ory
availablef orsale $156,
00
0
– Costofgoodsol d $134,
00
0
Endingi nv entory $22,00
0
or

S-
102
2,
000uni
ts*$11=$22,
000

S-
103
4-
10. Assumeinpr obl
em 9thatt
heBradl
eyCorpor
ati
onusedLIFOaccount
ing
i
nsteadofFIFO,whatwouldgr
ossprof
itbe?Whatwouldbetheval
ueof
endi
nginventory
?

Sol
uti
on:
Br
adl
eyCor
por
ati
on(
Cont
inued)

Sales(13,000@ $208,
000
$16)
Costofgoodssol d:
Newi nventory:
Quantit
y( uni
ts) 12,
000
Costperuni t $ 1
1
Total $132,
00
0
Oldinventory:
Quantit
y( uni
ts) 1,
000
Costperuni t $
8
Total $ 8,00
0
Totalcostofgoods
sold $140,
000
Grosspr ofi
t $68,000

Valueofendi ng
i
nv entor y
:
Beginningi nventor
y
(3,
000*$8) $24,00
0
+ Total production
(12,000*$11) $132,
00
0
Total i
nv entory
availableforsale $156,
00

S-
104
 0
– Costofgoodsol
d $140,
00
0
Endi
ngi
nvent
ory $16,00
0
or
2,
000uni
ts*$8=$16,
000

4-
11. Spri
ntShoes,
Inc.
,hadabegi
nni
ngi
nvent
oryof9,
000uni
tsonJanuar
y1,
2001.

Thecost
sassoci
atedwi
tht
hei
nvent
orywer
e:

Materi
al........$13.
00peruni
t
Labor.......... 8.00peruni
t
Overhead....... 6.10peruni
t

Dur
ing2001,
theypr
oduced42,
500uni
tswi
tht
hef
oll
owi
ngcost
s:

Materi
al........$15.
50peruni
t
Labor.......... 7.80peruni
t
Overhead....... 8.30peruni
t

Salesfort
heyearwere47,
250uni
tsat$39.60each.Spr
intShoesuses
LIFOaccount
ing.Whatwasthegr
ossprofi
t?Whatwast hevalueof
endinginv
ent
ory?

Sol
uti
on:
Spr
intShoes,
Inc.

Sales(47,250@ $1,
871,
100
$39.60)
Costofgoodssol d:
Newi nventory:
Quantit
y( uni
ts) 42,
500
Costperuni t $ 31.60
Total $1,
343,
000
Oldinventory:
Quantit
y( uni
ts) 4,
750

S-
105
 Costperunit $ 27.
10
Total $ 128,
725
Totalcostofgoods
sold $1,
471,
725
Grossprofi
t $ 399,
375

Valueofendi ng
i
nv entor y:
Begi nni
ngi nventor
y
(9,000*$27. 10) $ 243,
900
+ Total product ion $1,
343,
000
(42,500*$31. 60)
Total i
nv ent ory
avai l
ablef orsale $1, 586,
900
– Costofgoodsol d $1, 471,
725
Endi nginv entory $ 115,
175
or
42,500uni ts*$27. 10=$115,
175

4-
12. Vict
ori
a'
sAppar
elhasf
orecastcr
edi
tsal
esf
ort
hef
our
thquar
teroft
he
yearas:

September(
actual
) $50,
000
Fourt
hQuar
ter
October $40,
000
November 35,
000
December 60,
000

Experi
encehasshownthat20percentofsal
esar
ecol
lect
edinthe
monthofsale,70per
centi
nthefoll
owingmonth,
and10percentar
e
nevercol
lect
ed.

Prepareaschedul
eofcashr ecei
ptsf
orVi
ctor
ia'
sAppar
elcov
eri
ngt
he
fourt
hquart
er(Octobert
hroughDecember
).

Sol
uti
on:
Vi
ctor
ia'
sAppar
el

S-
106
 Septemb October November December
er
Credi
tsal es $50,000 $40,
000 $35,
000 $60,
000
20%Col lect
ed
i
nmont hof 8,
000 7,
000 12,
000
sales
70%Col lect
ed
i
nmont hafter 35,
000 28,
000 24,
500
sales
Totalcash
recei
pts $43,
000 $35,
000 $36,
500

4-
13. Watt
'sLi
ghti
ngStoresmadethefoll
owingsal
espr
oject
ionsf
ort
henext
si
xmonths.All
salesar
ecredi
tsales.

March $30,
000 June $34,
000
Apr
il 36,
000 Jul
y 42,
000
May 25,
000 August 44,
000

Sal
esi
nJanuar
yandFebr
uar
ywer
e$33,
000and$32,
000,
respect
ivel
y.

Experi
encehasshownthatoft
otalsal
es,10percentareuncoll
ect
ible,
30
percentar
ecoll
ectedi
nthemonthofsale,40percentarecol
lect
edi nt
he
fol
lowingmonth,and20per
centar
ecollectedt
womont hsaf
tersale.

Prepar
eamont
hlycashr
ecei
ptsschedul
efort
hef
ir
mforMar
cht
hrough
August.

Ofthesal
esexpect
edtobemadeduringthesixmonthsf
rom Mar
ch
t
hroughAugust,
howmuchwi l
lst
il
lbeuncoll
ectedatt
heendofAugust
?
Howmuchoft hi
sisexpect
edtobecoll
ectedl
ater?

S-
107
 Sol
uti
on:
Watt
'sLi
ghti
ngStores
CashRecei
ptsSchedul
e
January Februar
y March Apr
il May June July August
Sales $33,000 $32,
000 $30,
000 $36,
000 $25,
000 $34,000 $42,
000 $44,000
Col l
ect ions
(30%of
current 9,
000 10,
800 7,
500 10,
200 12,
600 13,
200
sales)
Col l
ect ions
(40%of
prior 12,
800 12,
000 14,
400 10,
000 13,
600 16,
800
mont h's
sales)
Col l
ect ions
S-

(20%of
106

sales2 6,
600 6,
400 6,
000 7,
200 5,
000 6,
800
mont hs
earlier)
Tot al cash $28,
400 $29,
200 $27,
900 $27,
400 $31,
200 $36,
800
recei pts

Sti
ll
due(uncollected)inAugust:
Baddebts:($30,000+36, 000+25,000+34,000+42,000+44,
000) .
1=(
211,
000) .
1=$21,
100
Tobecollectedfrom Julysales:
($42,
000 . 20)=$8,
400
Tobecollectedfrom Augustsales:(
$44,
000 . 60)=$26,
400
$21,
100+$8, 400+$26, 400=$55,900due
Expect
edt obecol l
ected:
$55,
900due–$21,
100baddebt
s=$34,
800

S-
106
4-
14. Ultr
avisi
on,Inc.anti
cipatessalesof$240,
000f rom Januar
ythr
ough
April
.Material
swi l
lrepresent50percentofsalesandbecauseoflev
el
producti
on,mat eri
alpurchaseswi l
lbeequalforeachmont hov
erthe
fourmont hsofJanuar y,Februar
y,March,andApril
.

Materi
alsarepaidf oraf
tert
hemont hpurchased.Materi
alspurchasedin
Decemberofl astyearwere$20,000(hal
fof$40,000insales)
,labor
cost
sf oreachoft hefourmonthsaresli
ghtl
ydiff
erentduetoapr ovi
sion
i
nal aborcontractinwhichbonusesarepaidinFebruar
yandApr il
.The
l
aborfiguresare:

January $10,
000
Februar
y $13,
000
March $10,
000
Apri
l $15,
000

Fi
xedoverheadis$6,
000permont
h.Pr
epar
easchedul
eofcash
payment
sf orJanuar
ythr
oughApr
il
.

S-
107
 Sol
uti
on:
Ult
rav
isi
on,I
nc.
CashPaymentSchedul
e

Dec. Jan. Feb. March Apr

il
* Purchases $20,
000 $30,
000 $30,000 $30,
000 $30,
000
**Paymenttomater
ial 20,
000 30,000 30,
000 30,
000
purchases
Labor 10,
000 13,
000 10,
000 15,
000
Fixedover
head 6,
000 6,
000 6,
000 6,
000
TotalCashPayment
s $36,
000 $49,
000 $46,
000 $51,
000

ForJanuar
ythr
oughApr
il
S-
108

*Monthl
ypur
chasesequal($240,
000*50%) /
4or$120,
000/
4=$30,
000
*
*Pay
mentisequalt
opriormonth'
spurchases.
4-
15. TheDenv
erCorporat
ionhasf
orecastt
hef
oll
owi
ngsal
esf
ort
hef
ir
st
sev
enmonthsofthey ear
:

January $10,
000 May $10,
000
Februar
y 12,
000 June 16,
000
March 14,
000 Jul
y 18,
000
Apri
l 20,
000

Mont hlymat er
ial purchasesar esetequal t
o30per centofforecasted
salesfort henextmont h.Ofthetotal mat eri
al costs,40percentarepaid
i
nt hemont hofpur chaseand60per centint hef ol
l
owi ngmont h.Labor
costswi ll
r un$4, 000permont h,andf ixedov erheadi s$2,000permont h.
Inter
estpay ment sont hedebtwi llbe$3, 000f orbot hMar chandJune.
Final
ly,theDenv ersal esforcewi l
lreceivea1. 5percentcommi ssi
onon
totalsalesf orthef ir
stsi xmont hsoft hey ear ,tobepai donJune30.

Prepareamont hl
ysummar yofcashpaymentsf ort
hesix-
monthperiod
fr
om JanuarythroughJune.(
Note:ComputepriorDecemberpurchases
tohelpgett
otal mater
ial
paymentsforJanuar
y.)

S-
109
 Sol
uti
on
DenverCor
porat
ion
CashPaymentsSchedul
e
Dec. Jan. Feb. March Apr
il May June Jul
y
Sal es $10,
000 $12,000 $14,
000 $20,
000 $10,
000 $16,000 $18,
000
Pur chases
(30%ofnext
mont h'
ssales) 3,
000 3,
600 4,
200 6,
000 3,
000 4,
800 5,
400
Pay ment( 40%
ofcur rent
pur chases) 1,
440 1,
680 2,
400 1,
200 1,
920 2,
160
Mat er i
al
pay ment( 60%
ofpr evious 1,
800 2,
160 2,
520 3,
600 1,
800 2,
880
S-

mont h'
s
110

pur chases)
Tot al payment
format er
ial
s 3,
240 3,
840 4,
920 4,
800 3,
720 5,
040
Laborcost s 4,
000 4,
000 4,
000 4,
000 4,
000 4,
000
Fixed 2,
000 2,
000 2,
000 2,
000 2,
000 2,
000
ov erhead
Inter est
pay ment s 3,
000 3,
000
Sal es
commi ssion
(1.5%of 1,
230
$82, 000)
Tot al $9,
240 $9,
840 $13,
920 $10,
800 $9,
720 $15,
270
pay
ment
s

S-
111
4-
16. TheBoswel
lCorpor
ati
onf
orecast
sit
ssal
einuni
tsf
ort
henextf
our
monthsasf
oll
ows:

March $6,
000
Apri
l 8,
000
May 5,
500
June 4,
000

Boswel l
mai ntai
nsanendi nginvent or
yf oreachmont hintheamountof
oneandonehal ftimestheexpect edsal esinthefollowingmont h.The
endinginventoryforFebruary(Mar ch'
sbegi nni
nginv entor
y )r
efl
ectsthi
s
poli
cyMat erial
scost$5peruni tandar epaidforint hemont hafter
producti
on.Laborcosti s$10peruni tandispaidf orinthemont h
i
ncur r
ed.Fixedov erheadis$12,000permont h.Dividendsof$20, 000ar
e
tobepai dinMay .Fivethousanduni tswer eproducedi nFebruary.

Computeaproduct
ionschedul
eandasummar yofcashpaymentsf
or
March,Apr
il
,andMay.Rememberthatpr
oduct
ioninanyonemonthis
equalt
osalespl
usdesir
edendingi
nvent
orymi
nusbeginni
nginvent
ory
.
Sol
uti
on:
Boswel
lCorporat
ion
Pr
oduct
ionSchedule
Mar ch Apri
l May June
Forecast eduni tsales 6,
000 8,
000 5,
500 4,
000
+Desi redendi ng 12,
000 8,
250 6,
000
i
nv entor y
–Begi nni ngi nv entory 9,
000 12, 000 8,
250
Unitst obepr oduced 9,
000 4,
250 3,
250
CashPayments
Feb March Apri
l May
Unitspr oduced 5,
000 9,
000 4,
250 3,
250
Mat eri
al s( $5/ unit)
mont haf ter $25,000 $45, 000 $21,
250
product i
on
Labor( $10/ uni t)
mont hofpr oduct ion 90,
000 42,
500 32,500
Fi
xedov erhead 12,
000 12,
000 12,000
Dividends 20,
000
Total CashPay ment s $127,00 $99, 500 $85,
750

S-
111
 0
4-
17. TheVol
tBat
ter
yCompanyhasf
orecasti
tssal
esi
nuni
tsasf
oll
ows:

January 800 May 1,

350
Februar
y 650 June 1,
500
March 600 Jul
y 1,
200
Apri
l 1,
100

VoltBat
ter
yalwayskeepsanendinginv
entor
yequalt
o120per centof
thenextmont
h'sexpectedsal
es.Theendi
nginv
entor
yforDecember
(Januar
y'
sbeginni
nginvent
ory
)is960unit
s,whi
chisconsi
stentwitht
his
poli
cy.

Materi
alscost$12peruni
tandarepaidforthemonthafterpurchase.
Laborcostis$5peruni
tandispaidinthemonththecostisincurred.
Overheadcostsare$6,
000permonth.Int
erestof$8,
000isschedul edto
bepaidinMar ch,
andemployeebonusesof$13,200wil
lbepaidi nJune.

Prepar
eamonthlypr
oduct
ionschedul
eandamont hl
ysummaryofcash
paymentsf
orJanuar
ythr
oughJune.Voltpr
oduced600uni
tsi
n
December.

S-
112
 Sol
uti
on:
Vol
tBatt
eryCompany
Product
ionSchedul
e

Jan. Feb. Mar

ch Apri
l May June July
For
ecastedunitsal
es 800 650 600 1,
100 1,350 1,500 1,200
+Desir
edending 780 720 1,
320 1,
620 1,800 1,440
i
nvent
ory
–Beginningi
nventor
y 960 780 720 1,
320 1,
620 1,
800
=Unit
stobepr oduced 620 590 1,
200 1,
400 1,
530 1,
140
SummaryofCashPayment
s
Dec. Jan. Feb. Mar ch Apri
l May June
S-

Uni
tsproduced 600 620 590 1,
200 1,
400 1,
530 1,140
113

Mater
ialcost($12/uni
t)
monthafterpurchase $7,
200 $7,
440 $7,
080 $14,
400 $16,
800 $18,
36
0
Laborcost($5/uni
t)
mont hi
ncurred 3,
100 2,
950 6,
000 7,
000 7,
650 $5,
700
Overheadcost 6,
000 6,
000 6,
000 6,
000 6,
000 6,000
I
nterest 8,
000
Employeebonuses 13,
200
TotalCashPayment s $16,
300 $16,
390 $27,
080 $27,
400 $30,
450 $43,
26
 0

S-
114
4-
18. LansingAut oParts,I
nc.,haspr
oject
edsalesof$25,000inOctober,
$35,000inNov ember ,
and$30,000inDecember .Ofthecompany '
ssal
es,
20per centarepaidforbycashand80per centaresoldoncredit
.The
creditsal
esar ecoll
ectedonemont haf
tersale.Det
erminecoll
ecti
onsfor
Nov emberandDecember .

Alsoassumethatt
hecompany'
scashpaymentsf orNovemberand
Decemberare$30,
400and$29,
800,r
espect
ivel
y.Thebeginni
ngcash
balancei
nNovemberi
s$6,000,
whichist
hedesiredmi ni
mum balance.

Prepar
eacashbudgetwi
thborr
owingneededorrepay
ment
sfor
NovemberandDecember
.(Youwil
lneedtoprepar
eacashr
ecei
pts
schedul
efi
rst
.)

Sol
uti
on:
Lansi
ngAutoParts,
Inc.
CashRecei
ptsSchedule

October November December

Sales $25,000 $35,
000 $30,
000
Cashsal es 7,
000 6,
000
(20%)
Collections
(80%of 20,
000 28,
000
previous
mont h'ssales)
Total cash
receipts $27,
000 $34,
000

CashBudget

November December
Cashrecei
pts $27,000 $34,
000
Cashpayments 30,400 29,
800
NetCashFlow (
3,400) 4,
200
Begi
nningCashBal
ance 6,000 6,
000
Cumulati
veCashBal
ance 2,600 10,
200
Monthl
yLoanor(Repayment
) 3,400 (3,
400)

S-
114
Cumulat
iveLoanBal
ance 3,
400 -0-
Endi
ngCashBalance $6,
000 $6,
800

S-
115
4-
19. Harry'
sCarryoutStoreshaseightlocati
ons.Thefi
rm wishest oexpand
bytwomor estoresandneedsabankl ongtodothis.Mr.Wilson,t
he
banker,wil
lfi
nanceconstruct
ionifthef i
rm canpr
esentanaccept abl
e
thr
ee-monthf i
nancialpl
anforJanuar ythr
oughMar ch.Thefollowi
ngare
actualandforecastedsal
esfigures:

Actual For
ecast Addit
ionalI
nfor
mati
on
November$200,000 January Apr
ilf
orecast$330,
000
$280,000
December220,000 Febr uary 320,
000
March 340, 000

Ofthef ir
m' ssales, 40percentar eforcashandt her emai ni
ng60per cent
areoncr edi t
.Ofcr editsales,30per centar epaidi nthemont haf t
ersale
and70per centarepai dinthesecondmont hafterthesal e.Mat eri
als
cost30per centofsal esandar epur chasedandr eceivedeachmont hin
anamountsuf fi
cienttocov ert hefollowingmont h'sexpect edsales.
Materialsar epaidf orinthemont haf tertheyarer ecei
v ed.Labor
expensei s40per centofsal esandi spaidi nthemont hofsal es.Sell
ing
andadmi nistr
ati
veexpensei s5per centofsal esandi sal sopai dinthe
mont hofsal e.Ov erheadexpensei s$28, 000i ncashpermont h.
Depreciationexpensei s$10, 000permont h.Taxesof$8, 000wi l
lbepai d
i
nJanuar y,anddiv i
dendsof$2, 000wi ll
bepai dinMar ch.Cashatt he
beginningofJanuar yi
s$80, 000andt hemi ni
mum desi redcashbal ance
i
s$75, 000.

ForJanuary
,Februar
y,andMarch,prepar
easchedul
eofmonthl
ycash
recei
pts,
mont hl
ycashpayments,andacomplet
emonthl
ycashbudget
withborr
owingsandrepayments.

S-
116
 Sol
uti
on:
Harr
y'
sCarry
-OutStor
es
CashRecei
ptsSchedul
e

November December Januar

y Febr uar
y March Apr
il
Sales $200,
000 $220,000 $280,
000 $320,
000 $340,
000 $330,
000
Cashsal es( 40%) 80,
000 88,
000 112,
000 128,000 136,
000 132,000
Creditsales( 60%) 120,000 132,
000 168,
000 192,000 204,
000 198,000
Collecti
ons
(mont haf t
er 36,
000 39,
600 50,
400 57,
600 61,
200
creditsales)30%
Collecti
ons( two
S-

mont hsaf ter 84,

000 92,
400 117,
600 134,
400
116

creditsales)70%
Total Cash $235,
600 $270,
800 $311,
200
Receipts
 Har
ry'
sCarry
-OutSt
ores(
cont
inued)
CashPayment
sSchedul
e

Januar
y Febr
uar
y Mar
ch
Payment sforPur chases( 30%ofnex
t
mont h'
ssalespai dinmont haf
ter
purchases—equiv alentto30%ofcurrent $84,
000 $96,
000 $102,
00
sal
es) 0
LaborExpense( 40%ofsal es) 112,
000 128,
000 136,
000
Sell
ingandAdmi n.Exp.( 5%ofsal
es) 14,
000 16,
000 17,
000
Overhead 28,
000 28,
000 28,
000
Taxes 8,
000
Divi
dends 2,
000
TotalCashPay ment s* $246,
000 $268,
000 $285,
00
S-
117

*
The$10,
000ofdepr
eci
ati
oni
sexcl
udedbecausei
tisnotacashexpense.
 Har
ry'
sCar
ry-
OutStor
es(cont
inued)
CashBudget

Januar
y Februar
y March
TotalCashRecei pts $235,
600 $270,800 $311,
200
TotalCashPay ment s 246,
000 268,000 285,
000
NetCashFl ow (10,
400) 2,
800 26,
200
BeginningCashBal ance 80,
000 75,
000 75,
000
Cumul ati
veCashBal ance 69,
600 77,
800 101,
200
Mont hl
yLoanor( r
epayment
) 5,
400 (2,
800) (2,
600)
Cumul ati
veLoanBal ance 5,
400 2,
600 -0-
EndingCashBal ance $75,
000 $75,000 $98,
600
S-
118
4-
20. ArcherEl
ectr
oni
csCompany
'sactualsal
esandpur
chasesforApr
iland
Mayar eshownher
eal
ongwithforecast
edsal
esandpurchasesf
orJune
thr
oughSeptember
.

Sal
es Purchases
Apri
l(actual) $320,
000 $130,
000
May(actual) 300,
000 120,
000
June(forecast) 275,
000 120,
000
Jul
y(forecast) 275,
000 180,
000
August(forecast
) 290,
000 200,
000
Sept
ember( f
orecast
) 330,
000 170,
000

Thecompanymakes10per centofit
ssalesf
orcashand90per centon
credi
t.Ofthecreditsales,
20per centar
ecoll
ectedinthemonthaftert
he
saleand80per centarecollect
edt womonthsafter.Ar
cherpay
sfor40
percentofit
spur chasesinthemont haft
erpurchaseand60percenttwo
mont hsaft
er.

Laborexpenseequal
s10percentofthecurrentmonth'
ssales.Overhead
expenseequals$12,
000permonth.Inter
estpaymentsof$30,000ar e
dueinJuneandSeptember.Acashdi vi
dendof$50,000isscheduledto
bepaidinJune.Taxpaymentsof$25,000aredueinJuneand
September.Ther
eisascheduledcapit
aloutl
ayof$300,000in
September.

ArcherElect
ronics'endi
ngcashbal anceinMayi s$20,000.Themi ni
mum
desiredcashbalanceis$10,000.Prepareaschedul eofmont hl
ycash
receipt
s,monthlycashpay ments,andacompl et
emont hlycashbudget
withborrowingandr epaymentsforJunet hroughSeptember.The
maximum desi r
edcashbal anceis$50,000.Excesscash( above
$50,000)isusedt obuymar ket
ablesecuri
t i
es.Marketabl
esecurit
iesar
e
soldbeforeborrowingfundsincaseofacashshor tfal
l(l
essthan
$10,000).

S-
119
 Sol
uti
on:
ArcherElect
roni
cs
CashReceiptsSchedul
e

Apri
l May June Jul
y Aug. Sept.
Sales $320,
000 $300,
000 $275,
000 $275,
000 $290,000 $330,000
+ CashSal es( 10%) 32,
000 30,
000 27,
500 27,
500 29,000 33, 000
CreditSales( 90%) 288,
000 270,000 247,500 247,500 261, 000 297, 000
+ Collecti
ons
(mont haftersale) 57,
600 54,
000 49,
500 49,
500 52,
200
20%
+ Collecti
ons
(secondmont h
S-
120

aftersale)80% 230,
400 216,000 198,000 198,000
Tot alCash $311,
900 $293,
000 $276,
500 $283,
200
Receipts
 Ar
cherEl
ect
roni
cs(cont
inued)
CashPaymentsSchedule

Apri
l May June Jul
y Aug. Sept.
Purchases $130,
000 $120,
000 $120,
000 $180,
000 $200,000 $170,000
Payment s( month
aft
erpur chase—40%) 52,
000 48,
000 48,
000 72,
000 80,
000
Payment s( second
mont hafter
purchase—60%) 78,
000 72,
000 72,
000 108,
000
LaborExpense( 10%
S-

ofsales) 27,
500 27,
500 29,
000 33,
000
121

Overhead 12,
000 12,
000 12,
000 12,
000
I
nterestPay ment s 30,
000 30,
000
CashDi vidend 50,
000
Taxes 25,
000 25,
000
CapitalOutlay 30,
000
TotalCashPay ments $270,
500 $159,
500 $185,
000 $588,
000
 Ar
cherEl
ectr
oni
cs(cont
inued)
CashBudget

June Jul
y August Sept
embe
r
CashReceipts $311,
900 $293,
000 $276,
500 $283,
200
CashPayment s 270,
500 159,
500 185,
000 588,000
NetCashFlow 41,
400 133,
500 91,
500 (304,800)
Begi
nningCashBal ance 20,
000 50,
000 50,
000 50,
000
Cumulati
veCashBal ance 61,
400 183,
500 141,
500 (254,800)
Monthl
yBor r
owi ngor(Repayment) -
- -
- -
- * 28,
400
S-

Cumulati
veLoanBal ance -
- -
- -
- 28, 400
122

Market
ableSecur i
ti
esPurchased 11,
400 133,
500 91,
500 -
-
(
Sold) -
- -
- (236,400)
Cumulati
veMar ketabl
eSecuri
ties 11,
400 144,
900 236,
400 -
-
Endi
ngCashBal ance 50,
000 50,
000 50,
000 10,
000

*
Cumul ati
veMar ket
ableSec.(Aug)
$236,
400
Cumulati
veCashBal ance(Sept)–254,
800
Requi
red(ending)CashBalance –10,000
MonthlyBorr
owi ng –$28,
400
4-
21. Owen' sEl ectr
onicshas90oper ati
ngpl antsinsevensouthwester
n
states.Sal esforlastyearwer e$100mi l
li
on,andthebalancesheetat
year-endi ssimilarinpercentageofsalest othatofprevi
ousyears(and
thiswillcont i
nueint hefutur
e).Allassets(incl
udi
ngfixedassets)and
currentliabil
it
ieswi l
lvarydir
ectlywithsales.

Bal
anceSheet
(i
n$mi l
l
ions)

Asset
s Liabil
it
iesandSt ockhol
der
s'Equi
ty
Cash $2 Accountspay able $15
Account
srecei
vabl
e 20 Accruedwages 2
I
nventor
y 23 Accruedtaxes 8
Curr
entasset
s $45 Currentl
iabiliti
es $25
Fi
xedassets 40 Notespay able 10
Commonst ock 15
Retai
nedear ni ngs 35
Totalli
abil
it
iesand
Tot
alasset
s $85 st
ockholder s' equi
ty $85

Owen'
shasanaf
tert
axpr
ofi
tmar
ginof7per
centandadi
vi
dendpay
out
r
ati
oof40per
cent.

I
fsal
esgrowby10percentnexty
ear,det
erminehowmanydol
l
arsof
newfundsar
eneededtofi
nancethegrowth.

S-
123
 Sol
uti
on:
OwensEl
ect
roni
cs

4-
22. TheManningCompanyhast
hefol
l
owingfinanci
alst
atement
s,whi
char
e
repr
esent
ati
veoft
hecompany'
shi
stor
ical
av er
age.

I
ncomeStat
ement
Sales $200,
000
Expenses 158,
000
Earni
ngsbefor
einter
estandt
axes $42,000
I
nterest 7,
000
Earni
ngsbefor
etaxes $35,000
Taxes 15,
000
Earni
ngsaft
ertaxes 20,
000
Divi
dends $ 6,
000

S-
124
 Bal
anceSheet

Asset
s Liabil
it
iesandSt ockhol
ders'
Equit
y
Cash $ 5,
000 Accountspay able $25,000
Account
srecei
vabl
e Accruedwages 1,
000
40,
000
I
nventor
y 75,
000 Accruedtaxes 2,
000
Curr
entasset
s $120,
000 Cur rentl
iabiliti
es $28,000
Fi
xedassets 80,
000 Notespay able 7,
000
Long-ter
m debt 15,
000
Commonst ock 120,000
Retai
nedear ni ngs 30,
000
Totalli
abil
it
iesand
Total
assets $200,
000 stockholder s' equi
ty $200, 000

Thefir
mi sexpecti
nga20per centincr
easeinsalesnextyear,and
managementi sconcernedaboutt hecompany '
sneedf orexter
nalfunds.
Theincreasei
nsalesi sexpectedtobecar r
iedoutwit
houtany
expansi
onoff i
xedassets,butr at
herthr
oughmor eeffi
cientasset
uti
li
zati
onintheexisti
ngstore.Amongl iabi
li
ti
es,onl
ycurrentli
abi
li
ties
varydi
rectl
ywithsales.

Usi
ngt hepercent-
of-
sal
esmet hod, det
erminewhethert
hecompanyhas
ext
ernalfi
nancingneeds,orasurplusoffunds.(
Hint:Aprof
itmar
ginand
payoutrat
iomustbef oundfrom theincomestatement.
)

S-
125
Sol
uti
on:
Manni
ngCompany

Spont
aneousAsset
s=Cur
rentAsset
s=Cash+Acc.Rec.+
I
nvent
ory

SpontaneousLi
abi
l
iti
es=Acc.Pay
abl
e+Accr
.Wages+
Accr.Taxes

Thef
ir
m needs$1,
600i
next
ernal
funds.

S-
126
4-
23. ConnMan' sShops, I
nc.
,anati
onalcl
othi
ngchain,hadsal
esof$300
mill
ionlastyear
.Thebusinesshasasteadynetprofi
tmarginof8
percentandadi v
idendpayoutr
ati
oof25per cent
.Thebalancesheetf
or
theendofl asty
earisshownbelow.

Bal
anceSheet
EndofYear
($mil
li
ons)

Asset
s Liabil
it
iesandSt ockhol
ders'Equi
ty
Cash $20 Accountspay able $70
Account
sreceiv
abl
e 25 Accruedexpenses 20
I
nventor
y 75 Otherpayables 30
Pl
antandequipment 120 Commonst ock 40
Retainedearni ngs 80
Totalli
abil
it
iesand
Tot
alasset
s $240 stockhol
der s' equi
ty $240

Thef i
rm'smarketi
ngstaffhastoldthepresi
dentthatinthecomingyear
therewil
lbealargeincreasei
nt hedemandf orovercoatsandwool
slacks.Asal
esincreaseof15per centi
sf or
ecastforthecompany.

Allbal
ancesheeti temsareexpectedt omaint
ainthesameper cent-
of-
salesrelati
onshi
psasl astyear
,exceptforcommonst ockandr etai
ned
earni
ngs.Nochangei sscheduledinthenumberofcommonst ock
sharesout st
anding,andret
ainedearningswil
lchangeasdictatedbythe
profi
tsanddi vi
dendpolicyofthefi
rm.( Rememberthenetprofi
tmar gi
n
i
s8per cent.
)

a. Wil
lexter
nalfi
nancingberequi
redforthecompanyduri
ngthe
comingyear?
b. Whatwouldbet heneedforext
ernalfi
nanci
ngift
henetprofi
t
marginwentupt o9.5per
centandthedivi
dendpayoutr
ati
owas
i
ncreasedto50percent?Expl
ain.

S-
127
Sol
uti
on:
ConnMan'
sShops,
Inc.

Anegati
vefi
guref
orrequir
ednewf undsindi
catest
hat
anexcessoff
unds($2.
7mi l.
)isav
ailabl
efornew
i
nvestment
.Noexter
nalfundsareneeded.

S-
128
Thenetpr ofi
tmar gi
ni ncr
easedsl i
ghtly,
from 8%t o
9.5%, whi
chdecreasest heneedf orexternalf
undi ng.
Thedi vi
dendpay outrati
oincreasedt r
emendousl y,
howev er,f
rom 25%t o50%, necessitat
ingmor e
externalfi
nanci
ng.Theef fectofthediv i
dendpolicy
changeov erpoweredt heeffectofthenetprofit
mar ginchange.

S-
129
Compr
ehensi
vePr
obl
ems
CP4-
1. Mansfiel
dCorpor
ati
onhad2001sal
esof$100mil
li
on.Thebal
ance
sheeti
temsthatvar
ydi
rect
lywi
thsal
esandthepr
ofi
tmarginar
eas
fol
lows:

Per
cent
Cash 5%
Accountsr ecei
vable 15
I
nv entor
y 20
Netf i
xedassets 40
Accountspay able 15
Accruals 10
Profitmarginaft
ertaxes 10%

Thedivi
dendpayoutrateis50percentofear
nings,andthebalancein
ret
ainedear
ningsattheendof2001was$33mi l
l
ion.Notespayableare
curr
entl
y$7mi l
li
on.Long-ter
m bondsandcommonst ockareconstant
at$5mi l
l
ionand$10mi ll
i
on, r
espect
ivel
y.

a. Howmuchaddi t
ionalexternal capi
t alwi l
lberequir
edfornexty ear
i
fsal esi ncrease15per cent ?(Assumet hatthecompanyi salr
eady
oper ati
ngatf ullcapacity.)
b. Whatwi llhappent oexter nalfundr equirement si
fMansf i
eld
Cor porationr educest hepay outratio,growsatasl owerr ate,or
suffersadecl inei nit
spr ofitmar gi
n?Di scusseachoft hese
separ ately.
c. Prepar eapr of ormabal ancesheetf or2002assumi ngt hatany
external fundsbei ngacqui redwi l
lbei nt heform ofnotespay able.
Disregar dthei nfor mati
oni npar tbi nanswer ingthisquestion(that
i
s, uset heor iginal i
nfor
mat i
onandpar tainconst r
ucti
ngy ourpr o
formabal ancesheet ).

CPSol
uti
on:
Mansf
iel
dCor
por
ati
on

S-
130
 b.IfMansf i
eldreducest hepayoutrat
io,thecompany
willr
etainmor eear ningsandneedl essext er
nal
funds.Asl owergr owt hratemeanst hatless
assetswi l
lhav etobef i
nancedandi nthi
scase,
l
essext ernalfundswoul dbeneeded.Adecl i
ning
profi
tmar ginwi l
ll
owerr et
ainedearningsand
forceMansf iel
dCor porati
ontoseekmor eexternal
funds.

c.
Mansfi
eldCorpor
ati
on(cont
inued)
Bal
anceSheet
—December31, 2002
(
Doll
arsinMil
li
ons)

Cash $5.75 Account sPay able $17.25

AccountsRecei
vabl
e 17.
25 Accr ual
s 11.50
I
nventory 23.
00 Not esPayabl e 17.501
NetFixedAsset
s 46.
00 Long- Ter
m Bonds 5.00
CommonSt ock 10.00
_____ Retai
nedEar nings 38.752
$92.0 $92.00
0
1
Ori
ginal
notespayabl
epl
usr equir
ednewf unds.Thi sist
hepl ug
fi
gure.
2
2002retai
nedear
nings(
beginningof2001)+PS2( 1-D)

S-
131
CP4-
2. Thedi ff
icul
tpartofsolvingaproblem oft
hisnatur
eistoknowwhattodo
withthei nf
ormationcont ai
nedwithi
nastoryprobl
em.Theref
ore,t
his
probl
em wi llbeeasiertocompleteifyour
elyonChapter4forthef
ormat
ofall
r equir
edschedul es.

TheAdamsCor porati
onmakesst andar
d-si
ze2-
inchfast
ener
s,whichi
t
sell
sfor$155perthousand.Mr.Adamsisthemajori
tyownerand
managest hei
nventor
yandf i
nancesofthecompany.Heesti
matessal
es
forthefol
l
owingmont hstobe:

January $263,
500(
1,700,
000f
ast
ener
s)
Februar
y $186,
000(
1,200,
000f
ast
ener
s)
March $217,
000(
1,400,
000f
ast
ener
s)
Apri
l $310,
000(
2,000,
000f
ast
ener
s)
May $387,
500(
2,500,
000f
ast
ener
s)

Lasty
earAdamsCor
porati
on'
ssal
eswer
e$175,
000i
nNov
emberand
$232,
500i
nDecember(
1,500,
000f
ast
eners)
.

Mr.Adamsi spr epari

ngf orameet ingwithhisbankertoarranget he
fi
nancingforthef i
rstquarter.Basedonhissalesforecastandt he
fol
lowinginf
ormat i
onhehaspr ovi
ded,yourjobashisnewf inancial
analy
stistopr epareamont hlycashbudget,amont hl
yandquar t
erl
ypro
for
mai ncomest at
ement ,apr oformaquarterl
ybalancesheet,andall
necessarysuppor t
ingschedul esforthefi
rstquar
ter.

Pasthistor
yshowst hatAdamsCor porat
ioncol l
ects50percentofits
accountsreceivabl
einthenor
mal 30- daycreditperi
od(themont hafter
thesale)andt heot
her50percentin60day s(twomont hsafterthesale).
Itpaysforit
smat eri
als30daysafterreceipt.I
ngener al
,Mr.Adamsl ikes
tokeepat wo-monthsupplyofinventoryinanticipat
ionofsales.Inv
ent ory
atthebeginningofDecemberwas2, 600,
000uni ts.(Thi
swasnotequal t
o
hisdesir
edtwo- monthsuppl
y.)

Themaj orcostofpr oducti

oni sthepur chaseofr awmat eri
alsintheform
ofst eelrods,whi charecut ,t
hreaded, andfinished.Lasty earrawmat eri
al
costswer e$52per1, 000fastener s,butMr.Adamshasj ustbeennot i
fi
ed
thatmat erialcost shaverisen,effectiveJanuar y1,t
o$60per1, 000
fasteners.TheAdamsCor porati
onusesFI FOi nventor
yaccount i
ng.Labor
costsar erelativelyconstantat$20pert housandf asteners,sinceworkers
arepai donapi ecewor kbasis.Ov erheadisallocatedat$10pert housand
unit
s, andsel l
ingandadmi ni
str
ativ eexpensei s20per centofsales.Labor
expenseandov erheadar edirectcashout flowspai dinthemont h
i
ncur red,whileinterestandt axesar epaidquar terl
y.

S-
132
Thecor por
ationusual l
ymai ntainsami nimum cashbal anceof$25, 000,
anditputsitsexcesscashi ntomar ketablesecur i
ti
es.Theav eraget ax
rat
eis40per cent,andMr .Adamsusual lypay sout50per centofnet
i
ncomei ndividendstost ockholders.Mar ketabl
esecuriti
esar esold
beforefundsar eborr
owedwhenacashshor tageisfaced.Ignorethe
i
nterestonanyshor t-
term borrowings.Interestonthelong-term debtis
pai
di nMar ch, asaretaxesanddi vidends.

AdamsCorporat
ion
Bal
anceSheet
December31,
200X

Asset
s
Currentassets:
Cash $ 30,
000
Accountsreceivabl
e 320,
000
I
nv ent
ory 237,
800
Totalcurr
entassets $ 587,
800
Fi
xedasset s:
Plantandequipment 1,
000,
000
Less:Accumul at
eddepr
eci
ati
on 200,
000 800,
000
Totalassets $1,
387,
800

Li
abil
i
tiesandSt
ockhol
der
s'Equit
y
Accountspay able $ 93, 600
Notespayable 0
Long-t
erm debt ,8per
cent 400,
000
Commonst ock 504,
200
Retai
nedear nings 390,
000
Totall
iabi
l
iti
esandst ockholder
s' $1,387,
800
equit
y

S-
133
CPSol
uti
on:
AdamsCorpor
ati
on
For
ecast
ingwit
hSeasonalPr
oduct
ion

Dec. Jan. Feb. Mar

.
ProjectedUnit
Sales 1,
500,
000 1,
700,
000 1,
200,
000 1,
400,
000
+Desired
Ending 2,
900,
000 2,
600,
000 3,
400,
000 4,
500,
000
I
nv entory(2
mont hssupply)
–Begi nni
ng
I
nv entory 2,
600,
000 2,
900,
000 2,
600,
000 3,
400,
000
Unitstobe
Produced 1,
800,
000 1,
400,
000 2,
000,
000 2,
500,
000

S-
134
 Mont
hlyCashPay
ment
s

Dec. Jan. Feb. Mar

.
Uni t
st obe
produced 1,800,
000 1,
400,
000 2,
000, 000 2,500,000
Mat er i
als
(fr
om pr ev i
ous $93,
600 $84, 000 $120, 000
mont h)
Labor( $20per
thousand $28,
000 $40, 000 $50, 000
units)
Ov erhead( $10
pert housand $14,
000 $20, 000 $25, 000
units)
Selli
ng&adm.
expense( 20% $52,
700 $37, 200 $43, 400
ofsal es)
Int
er est $8,000
Taxes( 40%
taxr ate) $64,560*
Dividends $48,420*
Tot al
Pay ment s $188,
300 $181, 200 $359, 380
* Seet hepr oformaincomestat
ement,whichfol
lowst his
mat eriallat
eron,fort
hedevel
opmentofthesevalues.

S-
135
 Mont
hlyCashRecei
pts(
AdamsCor
por
ati
on)

Nov. Dec. Jan. Feb. Mar.

Sal
es $175,
00 $232,
50 $263,
50 $186,
00 $217,
00
0 0 0 0 0
Coll
ect i
on
s(50%of
Previous 87,
500 $116,
25 131,
750 93,
000
mont h) 0
Coll
ect i
on
s(50%of2
mont hs 87,
500 116,
250 131,
750
earl
ier)
Total
Coll
ect i
on $203,
75 $248,
00 $224,
75
s 0 0 0

Mont
hlyCashFl
ow

Januar
y Februar
y March
CashReceipt
s $203,
750 $248,000 $224,
750
Cash 188,
300 181,200 359,
380
Payments
NetCashFlow 15,
450 66,
800 (
134,
630)

S-
136
 AdamsCor
porat
ion(
Cont
inued)
CashBudget

Januar
y Februar
y Mar ch
NetCashFl
ow $15,
450 $66,
800 $(134,630
)
Begi
nni
ngCashBal
ance 30,
000 25,
000
25,000
Cumul ativ
eCash $45,
450 $91,
800 ($109,630
Balance )
Loansand -0- -0- 47,380
(Repay ments)
Cumul ativ
eLoans -0- -0- 47,
380
Mar ketabl
eSecur i
ti
es 20,
450 66,
800 (
87,
250)
Cumul ativ
eMar ketabl
e
Secur i
ti
es 20,
450 87,
250 -0-
EndingCashBal ance $25,
000 $25,
000 $25,
000

AdamsCor
porati
on(conti
nued)
Pr
oFor
maI ncomeStatement

Jan. Feb. Mar

. Tot
al
Sales $263,500 $186,000 $217,
000 $666,
500
CostofGoods 139,400 98,400 126,000 363,800
Sold
GrossPr ofi
t 124,
100 87,
600 91,
000 302,
700
Sell
ingand
Admi n.Expense 52,
700 37,
200 43,
400 133,
300
I
nterestExpense 2,
667 2,
667 2,
666 8,
000
NetPr ofi
tBefore
Tax $68,
733 $47,
733 $44,
934 $161,
400
Taxes 27,
493 19,
093 17,
974 64,
560
NetPr ofi
tAfter
Tax $41,
240 $28,
640 $26,
960 $96,
840

S-
137
Less:Common
Divi
dends 48,
420
I
ncreasein
Retai
nedEarni
ngs $48,
420

S-
138
 CostofGoodsSol
d

UnitCostpert
housand Uni
tcostperthousand
st
befor
eJanuary1 aft
erJanuary1st
Materi
al $52 $60
Labor 20 20
Overhead 10 10
$82 $90

Endinginventor
yasofDecember31was2,900,000,t
herefor
e,
salesforJanuaryandFebruar
yhadacostofgoodssoldper
thousandunitsof$82,andMarchsal
esref
lectt
heincreasedcost
of$90pert housandunit
susingFI
FOinv
entorymethods.

Pr
oFor
maBal
anceSheet(
Mar
ch)

Asset
s Li
abili
ti
es&
Stockholders'
Equity
Curr
entAsset
s: CurrentLiabil
i
ties:
Cash $ 25,
000 AccountsPay able $ 150,
00
0
Account
s 310,
000 Not
esPay
abl
e 47,
380
Recei
vable
I
nventor
y 405,
000 Long-Ter
m Debt 400,
000
Pl
ant&Equi p: Stockhol
ders'
NetPlan 800,
000 Equit
y: 504,
200
CommonSt ock
Tot
alAsset
s $1,
540,
000 Retai
nedEar ni
ngs,
TotalLi
abil
i
ties&
Stockhol
ders' 438,
420
Equit
y $1,
540,
00
0

S-
139
S-
140
Explanati
onofChangesi
ntheBal
anceSheet:
Cash=endi ngcashbal
ancef
rom cashbudgeti
nMar ch
Account sr
ecei
vabl
e $217,000
=al lofMarchsal
es 93,000
plus50%ofFeb. $310,000
sales

I
nventor
y=endi
ngi
nvent
oryi
nMar
chof4,
500,
000uni
tsat$90
pert
housand

Plantandequi
pmentdi
dnotchangesi
ncewedi
dnoti
ncl
ude
depreci
ati
on.

RE=Ol
dRE+( NI–div
idends)
=$390,
000+($96,
840–$48,240)=$438,
420

S-
141