1, A cash budget enumerates receipts and disbursements. ANS: T 2. A cash budget seeks to determine estimated costs and revenues in order to forecast earnings. ANS: F The bottom line of a cash budget shows the firm's excess cash or need for external finance. » ANS: T 4. Depreciation is excluded from the cash budget. ANS: T 5. Cash outflows that are not expenses (e.9., mortgage payments) are excluded from the cash budget. ANS: F Accounts payable are excluding from the cash budget. 2 ANS: T 7. Collecting accounts receivable are including on the cash budget. ANS: T ‘A firm's earnings are not determined by the cash budget but are determined by the income statement. ANS: T 9. ad the speed with which receivables are collected has no impact on the cash udget. ANS: F.OBLEM 1. Given the following information, construct the firm's cash budget for the given months. 75 percent of sales are for credit, and collections occur after thirty days. a. b. A $150,000 Treasury bill matures in March. c. Monthly fixed disbursements are $30,000. d. Variable disbursements are 60 percent of sales and occur one month prior to sales. e. Atax payment of $25,000 is due in February. f. The initial cash is $80,000. g. The minimum required cash balance is $25,000. fh, Variable cash disbursements are given for April. January February March April Sales $100,000 120,000 140,000 Cash sales Collections Other receipts Total cash receipts - 40,000 Variable disbursements Fixed disbursements Other disbursements Total cash disbursements Net change during the month Beginning cash Ending cash Required cash Excess cash to invest Cash borrowedANS: Sales Cash sales Collections Other receipts Total cash receipts Variable disbursements Fixed disbursements Other disbursements Total cash disbursements Net change during the month Beginning cash Ending cash Required cash Excess cash to invest Funds borrowed 2. Prepare a monthly cash budget for a firm given the following information. Sales: June July August September October November January 60,000 30,000 90,000 (90,000) 80,000 (10,000) 25,000 35,000 February $100,000 25,000 25,000 72,000 30,000 25,000 127,000 (102,000) (10,000) (112,000) 25,000 137,000 March 120,000 30,000 75,000 150,000 255,000 84,000 30,000 114,000 141,000 (112,000) 29,000 25,000 4,000 April 140,000 35,000 90,000 125,000 40,000 30,000 70,000 55,000 29,000 84,000 25,000 59,000 $200,000 200,000 200,000 300,000 500,000 200,000 70% of the sales are for credit and are collected one month after the sale. Other receipts: $50,000 in October Variable disbursements: 60% of sales each month Other disbursements: $10,000 a month $80,000 for taxes in August $400,000 for debt repayment in November Beginning cash: $50,000 Desired cash: $10,000ANS: Cash budget for Receipts. Sales Cash sales Collections Other receipts Total receipts Disbursements Variable disbursements Fixed disbursements Other disbursements Total disbursements Net change in cash Initial cash position Ending cash position Desired level of cash Excess (shortage) of cash Cash budget for Receipts Sales Cash sales Collections Other receipts Total receipts Disbursements Variable disbursements Fixed disbursements Other disbursements Total disbursements Net change in cash Initial cash position Ending cash position Desired level of cash Excess (shortage) of cash June $200,000 60,000 60,000 120,000 10,000 130,000 (70,000) 50,000 (20,000) (10,000) (30,000) September $300,000 90,000 140,000 230,000 180,000 10,000 190,000 40,000 40,000 80,000 (10,000) 70,000 July $200,000 60,000 140,000 200,000 120,000 10,000 130,000 30,000 (20,000) 50,000 (10,000) 40,000 October $500,000 150,000 210,000 50,000 410,000 300,000 10,000 310,000 100,000 80,000 180,000 (10,000) 170,000 August $200,000 60,000 140,000 200,000 120,000 10,000 80,000 210,000 (10,000) 50,000 40,000 (40,000) 30,000 November $200,000 60,000 350,000 410,000 120,000 10,000 400,000 530,000 (120,000) 180,000 60,000 (10,000) 50,000_— 1 A firm with sales of $4000 has the following balance sheet. Corporation XYZ Balance Sheet as of June 30, 20XX 1000 ts receivable $ 1000 Accounts payable $ Inventory 2000 Long-term debt 3500 Plant 3000 Equity —_i500 $6,000 $6,000 firm earns 5 percent after taxes on sales and pays no dividends, ae Determine the entries for a new balance sheet for sales of $5,000 using the following estimated equations: ‘accounts receivable = $800 + 0.30Sales inventory = $1,300 + 0.35Sales accounts payable = $1,000 + 0.25Sales. b. Willthe firm need external financing? O Construct a new balance sheet using the estimates obtained in a. If necessahys issue new Sick to cover any external financing needs. If the firm has excess funds, retire the accounts payable. ANS: a. The balance sheet entries using the equations are accounts recelvable: $800 + 0.30(5,000)= 2300 inventory: $1,300 + 0.35(5000) = $3050 accounts payable: $1,000 + 0.25(50000= 2250 since the firm earns 5% after tax on sales of $5,000 and pays no dividends, equity increases by $250 b. The expansion in assets ($2350) exceeds the expansion in liabilities plus equity ($1500) by $850, so the firm will need additional external sources of finance. c. If the firm issues new stock, the balance sheet becomes: Corporation XYZ Balance Sheet as of June 30, 20XX Assets Liabilities and Equity Accounts receivable $ 2300 Accounts payable $ 2250 Inventory 3050 Long-term debt 3500 Plant 3000 Equity 1750 $8350 $8350 2. A financial manager needs to forecast the level of inventory. Currently ir f I. ly inver is 70 percent of sales. If the pomsaryes level of ea a what is the level of inventory forced by ihe percent of sales forecasting? If the equation relating inventory and sales is I = $1 oe Ce a eieeae era ry is I = $12,000 + 0.45, what is thepe of Sales: srventory = 70% of sales 27950 000) = $35,000 yesson: inventory, = $12,000+.45S = $12,000+.45($50,000) = $34,500 3, Firm X has the following balance sheet: Balance Sheet as of 12/31/XX Cash $ 15,000 Accounts payable $ 30,000 Marketable securities 17,000 Bank loans 15,000 ‘Accounts receivable 40,000 Bonds 80,000 Inventory 43,000 Common stock 40,000 Plant & equipment 85,000 Retained earnings 35,000 $200,000 200,000 Sales are currently $500,000 and management expects them to rise by 20 percent to $600,000. The profit margin on sales is 3 percent and the fir distributes 45 percent of its earnings as cash dividends. prot iow much external finance will be required by the expansion according to the percent of sales technique? b, Ifthe firm needs external finance, the funds should be acquired by Issuing long- tert a te Ifthe firm has excess funds, they should be held in marketable securities. If the firm needs funds, management may also draw upon the firm's holdings of Ans 2. (3,00/500,000 x 100,000) — (30,000/500,000 x 100,000) ~ (600,000)(.03)(.55) b. Balance Sheet as of 12/31/XX Cash - $ 15,000 Accounts payable Marketable securities 16300 Bankloang + Fe 00 Accounts receable 48,000 Bonds 0,000 ventory 51,600 Common stock , Plant & equipment 85,000 _Retained earnings eon $215,900 $215,900 4. Afirm has the folowing balance sheet as of XX/XX/XX: a Liabilities and Equity 1000 was $ Accounts payable Teteyeeeee 1200 Long-term debt $00 3500 Equity ardPlant —4300 Reta Is 9 ined earning Currently sales are $20,000 with a n ret dividends. Management expects sales As ig Margin of 15 percent and distribute 70% of its earnings as Increase to $25,000 and cee deca ts Xanson Cantu» orcad tance Set aero 50 sales. Ifthe firm needs funds, ‘Que of forecasting assets and liabilities that spontaneously vary with these funds may be a they should b quired through a bank. Ifthe firm has excess funds, ae Tr tis a nvested in marketable secures, Assume that cash does nat Increase withthe Increase in : Imption were not made, would your answer be different? ANS: Forecasted balance sheet entries using the percent of sales: Accounts Receivable 1200/20000 x 25000= 1500 Inventory 3500/20000 x 25000= 4375 Accounts Payable 1400/2000 x 25000 = 1750 Need for external finance = ($4700 / $20,000)($5,000)- ($1400 / $20,000)($5,000) - (.15)($25,000)(1-.70) = ($ 300) Excess Balance Sheet as of 12/31/XX Assets: Liabilities and Equity Cash $ 1000 Accounts payable $ 1750 Marketable securities 300 Accounts receivable 1500 Long-term debt 2800 Inventory 4375 Equity 5800 Plant & equipment —4300 _ Retained earnings —125 $1475 $1475 In this problem the firm generates excess cash, which is invested in short-term marketable securities. Even if the cash increases proportionately with sales from $1000 to $1250, the firm would still have excess funds, (Marketable securities would be $50.) Long-term debt spontaneously changes with the level of sales. ANS: F 2. Accounts payable are illustrative of liabilities that spontaneously vary with the level of sales. ANS: T 3. The percent of sales method of forecasting assumes that fixed assets vary proportionately with sales. ANS: F 4, The more a firm earns on additional sales, the less will be the need for external finance.ans: T ‘5, Inventory as a percent of sales tends to increase with increases in sales. ANS: F If accounts receivable are 20% of sales and the level of sales doubles, the percent of sales says that accounts receivable will be 40% of sales, ANS: F 7. If forecasting over-predicts the level of an asset, the firm will over-plan its financial needs. ANS: T 8, Ifa firm distributes a larger proportion of its earnings, the external need for finance is reduced. ANS: F 9. If fixed asset requirements increase with increases in sales, the firm will need more sources of finance. ANS: T 10. Regression analysis assumes that inventory as a percent of sales is constant. ANS: F 11. Regression analysis may be used to estimate the slope of the line relating sales and accounts receivable, ANS: T If regression analysis estimates that assets exceed liabilities and equity, the firm will require external sources of finance. 12. ANS: T Higher levels of sales are associated with increased holding of cash when regression analysis is used to 13. estimate a firm's need for funds. ANS: F 14, Regression analysis as a forecasting tool is less restrictive than the percent of sales. ANS: T 15. Long-term assets such as plant spontaneously vary with sales. ANS: F 16. The percent of sales method of forecasting assumes the | i es 19 le level of some assets varies proportionately with ANS: T18. 19. geqression analysis assumes that equity as a percent of total assets is fixed. ans: F if accounts receivable are 15% of sales and sales double, the regression analysis says that accounts receivable will become 30% of sales. ANS: F If profit margins increase as sales increase, the need for external finance is reduced. ANS: T