Balance Sheet and Net Sales

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PROBLEMS

1. Table 3.3 shows the December 31, 2009 pro- forma balance sheet and income statements for R& E Supplies, Inc. The pro- forma balance sheet shows that R& E Supplies will need external funding from the bank of $ 1.4 million. However, they show $ 1.27 million in cash and short- term securities. Why are they going to the bank when they have most of the required amount in their cash account?

2. Pro forma financial statements, by definition, are predictions of a company’s financial statements at a future point in time. So why is it important to analyze the historical performance of the company before constructing pro forma financial statements?

3. Suppose you constructed a pro forma balance sheet for a company and the estimate for external financing required was negative. How would you interpret this result?

4. Harlin Fencing Company’s sales, half of which are for cash, over the past three months were:

August September October

$70,000 $120,000 $80,000

a. Estimate Harlin’s cash receipts in October if the company’s collection period is 30 days.

b. Estimate Harlin’s cash receipts in October if the company’s collection period is 45 days.

c. What would be the October balance of Accounts Receivable for Harlin Fencing if the company’s collection period is 30 days? 45 days?

5. Suppose you constructed a pro forma balance sheet and a cash budget for a company for the same time period and the external financing required from the pro forma forecast exceeded the cash deficit estimated on the cash budget. How would you interpret this result?

6. Table 3.5 presents a computer spreadsheet for estimating R& E Sup-plies’ external financing required for 2009. The text mentions that with modifications to the equations for equity and net sales, the fore-cast can easily be extended through 2010. Write the modified equations for equity and net sales.

7. Using a computer spreadsheet, the information presented below, and the modified equations determined in question 6 above, extend the fore-cast for R& E Supplies contained in Table 3.5 through 2010. Is R& E’s external financing required in 2009 higher or lower than in 2010?

R& E Supplies Assumptions for 2009 ($ thousands)

Growth rate in net sales 30.0% Tax rate 45.0%
Cost of goods sold/ net sales 86.0% Dividend/ earnings after tax 50.0% Gen., sell. & admin. Current assets/ net sales 29.0%
expenses/net sales 11.0% Net fixed assets $270
Long- term debt $560 Current liabilities/ net sales 14.4%
Current portion long- term debt $100
Interest rate 10.0%

8. This and the following two problems demonstrate that pro forma forecasts, cash budgets and cash flow forecasts all yield the same estimated need for external financing— provided you don’t make any mistakes. For problems 8, 9, and 10, you may ignore the effect of added borrowing on interest expense.

The treasurer of Pepperton, Inc., a wholesale distributor of household appliances, wants to estimate his company’s cash balances for the first three months of 2009. Using the information below, construct a monthly cash budget for Pepperton for January through March 2009. Does it appear from your results that the treasurer should be concerned about investing excess cash or looking for a bank loan?

Pepperton Selected Information

Sales (20 percent for cash, the rest on 30- day credit terms):

2008 Actual

October $360,000 November 420,000 December 1,200,000

2009 Projected

January $600,000
February 240,000
March 240,000

Purchases (all on 60- day terms):

2008 Actual

October $510,000
November 540,000
December 1,200,000

2009 Projected

January $300,000
February 120,000
March 120,000

Wages payable monthly $180,000
Principal payment on debt due in March 210,000
Interest due in March 90,000
Dividend payable in March...
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