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Ch 07 - Fund Analysis, Cash-Flow Analysis, and Financial Planning

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Financial Management by Van Horne …

Financial Management by Van Horne
Ch 07 - Fund Analysis, Cash-Flow Analysis, and Financial Planning

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  • 1. 1Chapter 7Chapter 7Fund Analysis, Cash-Fund Analysis, Cash-Flow Analysis, andFlow Analysis, andFinancial PlanningFinancial Planning© 2001 Prentice-Hall, Inc.Fundamentals of Financial Management, 11/eCreated by: Gregory A. Kuhlemeyer, Ph.D.Carroll College, Waukesha, WI
  • 2. 2Fund Analysis, Cash-FlowFund Analysis, Cash-FlowAnalysis, and Financial PlanningAnalysis, and Financial PlanningFlow of Funds (Sources and Uses)StatementAccounting Statement of Cash FlowsCash-Flow ForecastingRange of Cash-Flow EstimatesForecasting Financial Statements
  • 3. 3Flow of Funds StatementFlow of Funds StatementHas been replaced by the cash flowcash flowstatementstatement (1989) in U.S. auditedannual reports.A summary of a firm’s changes infinancial position from one period toanother; it is also called a sources anduses of funds statement or a statementof changes in financial position.
  • 4. 4Why Examine the FlowWhy Examine the Flowof Funds Statementof Funds StatementQUESTION?QUESTION?Why should we bother tounderstand a Flow of FundsStatement that is no longerrequired to appear in U.S.audited annual reports?
  • 5. 5Why Examine the FlowWhy Examine the Flowof Funds Statementof Funds StatementIncludes important noncash transactionswhile the cash flow statement does not.Is easy to prepare and often preferred bymanagers for analysis purposes over themore complex cash flow statement.Helps you to better understand the cashflow statement, especially if it is preparedunder the “indirect method.”The Flow of Funds Statement:The Flow of Funds Statement:
  • 6. 6Flow of Funds StatementFlow of Funds StatementAll of the firm’s investments andclaims against those investments.Extends beyond justbeyond just transactionsinvolving cashcash.What are “fundsfunds”?
  • 7. 7Sources andSources andUses StatementUses StatementThe letters labelingthe boxes stand forUUsesses, SSourcesources,AAssetsssets, andLLiabilitiesiabilities (broadlydefined). The pluses(minuses) indicateincreases(decreases) inassets or liabilities.AA LL- ++ -SSUU
  • 8. 8BW’s DeterminationBW’s Determinationof Sources and Usesof Sources and Uses$ 100 - S410 - S616 + U5 --9 + U$ 1,140$ 1,140 N/A930 N/A(299) N/A$ 631$ 631 + U50 --223 --$ 2,044$ 2,044Cash and C.E. $ 90Acct. Rec. 394Inventories 696Prepaid Exp 5Accum Tax Prepay 10Current AssetsCurrent Assets $$ 1,1951,195Fixed Assets (@Cost) 1030Less: Acc. Depr. (329)Net Fix. AssetsNet Fix. Assets $ 701$ 701Investment, LT 50Other Assets, LT 223Assets 2003 2002 +/- S/UAssets 2003 2002 +/- S/U
  • 9. 9BW’s DeterminationBW’s Determinationof Sources and Usesof Sources and Uses$ 100 $10 S410 16 S616 80 U5 --9 1 U$ 1,140$ 1,140 N/A930 N/A(299) N/A$ 631$ 631 70 U50 --223 --$ 2,044$ 2,044Cash and C.E. $ 90Acct. Rec. 394Inventories 696Prepaid Exp 5Accum Tax Prepay 10Current AssetsCurrent Assets $$ 1,1951,195Fixed Assets (@Cost) 1030Less: Acc. Depr. (329)Net Fix. AssetsNet Fix. Assets $ 701$ 701Investment, LT 50Other Assets, LT 223Assets 2003 2002 +/- S/UAssets 2003 2002 +/- S/U
  • 10. 10BW’s DeterminationBW’s Determinationof Sources and Usesof Sources and Uses$ 295 - U94 --16 --100 --$$ 505505 N/A453 + S200 --729 --157 + S$$ 10861086 N/A$ 2,044$ 2,044Notes Payable $ 290Acct. Payable 94Accrued Taxes 16Other Accrued Liab. 100Current Liab.Current Liab. $ 500$ 500Long-Term Debt 530Shareholders’ EquityCom. Stock ($1 par) 200Add Pd in Capital 729Retained Earnings 210Total EquityTotal Equity $$ 1,1391,139Liabilities and Equity 2003 2002 +/- S/ULiabilities and Equity 2003 2002 +/- S/U
  • 11. 11BW’s DeterminationBW’s Determinationof Sources and Usesof Sources and Uses$ 295 $ 5 U94 --16 --100 --$$ 505505 N/A453 77 S200 --729 --157 53 S$$ 10861086 N/A$ 2,044$ 2,044Notes Payable $ 290Acct. Payable 94Accrued Taxes 16Other Accrued Liab. 100Current Liab.Current Liab. $ 500$ 500Long-Term Debt 530Shareholders’ EquityCom. Stock ($1 par) 200Add Pd in Capital 729Retained Earnings 210Total EquityTotal Equity $$ 1,1391,139Liabilities and Equity 2003 2002 +/- S/ULiabilities and Equity 2003 2002 +/- S/U
  • 12. 12USESUSES $156$156Increase, Inventories $80Increase, Accum Tax Prepay 1Decrease, Notes Payable 5Increase, Net Fixed Assets 70$156$156SOURCESSOURCESIncrease, Retained Earnings $ 53Decrease, Accounts Receivable 16Increase, Long-Term Debt 77Decrease, Cash + Cash Equivalents 10““Basic” SourcesBasic” Sourcesand Uses Statementand Uses Statement
  • 13. 13Adjusting the “Basic”Adjusting the “Basic”Sources and Uses StatementSources and Uses StatementThe following three slides areBasket Wonders’ Balance Sheetand Income Statement that wasdiscussed in Chapter 6.This information will be neededto adjust the “basic” Sourcesand Uses Statement.
  • 14. 14Basket Wonders’ BalanceBasket Wonders’ BalanceSheet (Asset Side)Sheet (Asset Side)a. How the firm stands ona specific date.b. What BW owned.c. Amounts owed bycustomers.d. Future expense itemsalready paid.e. Cash/likely convertibleto cash within 1 year.f. Original amount paid.g. Acc. deductions forwear and tear.Cash and C.E. $ 90Acct. Rec.cc394Inventories 696Prepaid Expdd5Accum Tax Prepay 10Current AssetsCurrent Assetsee$1,195$1,195Fixed Assets (@Cost)ff1030Less: Acc. Depr. gg(329)Net Fix. AssetsNet Fix. Assets $ 701$ 701Investment, LT 50Other Assets, LT 223bBasket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders Balance Sheet (thousands) Dec. 31, 2003a
  • 15. 15Basket Wonders’ BalanceBasket Wonders’ BalanceSheet (Liability Side)Sheet (Liability Side)a. Note, Assets =Liabilities + Equity.b. What BW owed andownership position.c. Owed to suppliers forgoods and services.d. Unpaid wages,salaries, etc.e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment.h. Earnings reinvested.Notes Payable $ 290Acct. Payablecc94Accrued Taxesdd16Other Accrued Liab.dd100Current Liab.Current Liab.ee$$500500 Long-Term Debtff530 Shareholders’Equity Com. Stock ($1par)gg200 Add Pd in Capitalgg729 RetainedEarningshh210 TotalTotalEquityEquity $$1,1391,139Basket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders Balance Sheet (thousands) Dec. 31, 2003
  • 16. 16Basket Wonders’Basket Wonders’Income StatementIncome Statementa. Measures profitabilityover a time period.b. Received, or receivable,from customers.c. Sales comm., adv.,officer’s salaries, etc.d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned forshareholders.Net Sales $ 2,211Cost of Goods Soldbb1,599Gross Profit $ 612SG&A Expensescc402EBITd$210 Interest Expensee59 EBTff$151 Income Taxes 60EATg$ 91Cash Dividends 38Increase in REIncrease in RE $ 53$ 53Basket Wonders Statement of Earnings (in thousands)Basket Wonders Statement of Earnings (in thousands)for Year Ending December 31, 2003for Year Ending December 31, 2003a
  • 17. 17Adjusting the “Basic”Adjusting the “Basic”Sources and Uses StatementSources and Uses StatementRecognize Profits and DividendsRecognize Profits and DividendsChange in retained earnings is composedof profits and dividends.Source: Net Profit $91Less Use: Cash Dividends 38(Net) Source: Incr., R.E.(Net) Source: Incr., R.E. $53$53
  • 18. 18Adjusting the “Basic”Adjusting the “Basic”Sources and Uses StatementSources and Uses StatementRecognize Depreciation and GrossRecognize Depreciation and GrossChanges in Fixed AssetsChanges in Fixed AssetsChange in net fixed assets is composedof depreciation and fixed assets.Source: Depreciation $ 30Less Use: Add. to F.A. 100(Net) Use: Incr., Net F.A.(Net) Use: Incr., Net F.A. $ 70$ 70
  • 19. 19SOURCESSOURCESFunds provided by operationsNet Profit $ 91Depreciation 30Decrease, Accounts Receivable 16Increase, Long-Term Debt 77Decrease, Cash + Cash Equivalents 10$224$224Sources and UsesSources and UsesStatement (Sources Side)Statement (Sources Side)
  • 20. 20USESUSESDividends $ 38Additions to fixed assets 100Increase, Inventories 80Increase, Accrued Taxes 1Decrease, Notes Payable 5$224$224Sources and UsesSources and UsesStatement (Uses Side)Statement (Uses Side)
  • 21. 21Analyzing the SourcesAnalyzing the Sourcesand Uses Statementand Uses StatementUsesUsesPrimarily throughan increase ininventories andexpenditures oncapital assets.SourcesSourcesPrimarilythrough netprofit fromoperations andlong-term debtincreases.
  • 22. 22Statement of Cash FlowsStatement of Cash Flowsoperating activitiesoperating activities,investing activitiesinvesting activities, andfinancing activitiesfinancing activities.This statement reports cash inflowsinflowsand outflowsoutflows based on the firm’sA summary of a firm’s paymentsduring a period of time.
  • 23. 23Statement of Cash FlowsStatement of Cash FlowsCash Flow from Operating ActivitiesShows impact of transactions notdefined as investing or financingactivities.These cash flows are generally the casheffects of transactions that enter into thedetermination of net income.
  • 24. 24Cash Flow FromCash Flow FromOperating ActivitiesOperating ActivitiesCash InflowsCash InflowsFrom sales of goods or servicesFrom interest and dividend incomeCash OutflowsCash OutflowsTo pay suppliers for inventoryTo pay employees for servicesTo pay lenders (interest)To pay government for taxesTo pay other suppliers for otheroperating expenses
  • 25. 25Cash Flow FromCash Flow FromOperating ActivitiesOperating ActivitiesIt would seem more logical to classifyinterest and dividend income as an“investing” inflow, while interest paidcertainly looks like a “financing”outflow.But, the U.S. Financial Accounting StandardsBoard -- by a slim 4 to 3 vote -- classified theseitems as “operating” flows.
  • 26. 26Statement of Cash FlowsStatement of Cash FlowsCash Flow from Financing ActivitiesCash Flow from Financing ActivitiesShows impact of all cash transactionswith shareholders and the borrowingand repaying transactions with lenders.Cash Flow from Investing ActivitiesCash Flow from Investing ActivitiesShows impact of buying and sellingfixed assets and debt or equitysecurities of other entities.
  • 27. 27Cash Flow FromCash Flow FromInvesting ActivitiesInvesting ActivitiesCash InflowsCash InflowsFrom sale of fixed assets (property, plant,equipment)From sale of debt or equity securities (otherthan common equity) of other entitiesCash OutflowsCash OutflowsTo acquire fixed assets (property, plant,equipment)To purchase debt or equity securities (otherthan common equity) of other entities
  • 28. 28Cash Flow FromCash Flow FromFinancing ActivitiesFinancing ActivitiesCash InflowsCash InflowsFrom borrowingFrom the sale of the firm’s own equitysecuritiesCash OutflowsCash OutflowsTo repay amounts borrowedTo repurchase the firm’s own equitysecuritiesTo pay shareholders dividends
  • 29. 29Indirect Method --Indirect Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Operating ActivitiesCash Flow from Operating ActivitiesNet Income $ 91Depreciation 30Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)Net cash provided (used) byNet cash provided (used) byoperating activitiesoperating activities $ 56$ 56
  • 30. 30Indirect Method --Indirect Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Investing ActivitiesCash Flow from Investing ActivitiesAdditions to Fixed Assets $(100)Net cash provided (used) byNet cash provided (used) byinvesting activitiesinvesting activities $(100)$(100)
  • 31. 31Indirect Method --Indirect Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Financing ActivitiesCash Flow from Financing ActivitiesIncrease, notes payable $ ( 5)Increase, long-term debt 77Dividends paid ( 38)Net cash provided (used) byNet cash provided (used) byfinancing activitiesfinancing activities $ 34$ 34
  • 32. 32Indirect Method --Indirect Method --Statement of Cash FlowsStatement of Cash FlowsIncrease (decrease) in cashIncrease (decrease) in cashand cash equivalentsand cash equivalents $ ( 10)$ ( 10)Cash and cash equivalents, 2002Cash and cash equivalents, 2002 100100Cash and cash equivalents, 2003Cash and cash equivalents, 2003 $ 90$ 90Supplemental cash flow disclosuresInterest paid $ 59Taxes paid 60
  • 33. 33Direct Method --Direct Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Operating ActivitiesCash Flow from Operating ActivitiesCash received from customersa$2,227Cash paid to suppliers andemployeesb(2,051)Interest paid ( 59)Taxes paidc( 61)Net cash provided (used) byNet cash provided (used) byoperating activitiesoperating activities $ 56$ 56a, b, cSee Worksheet on next slide for calculation
  • 34. 34Worksheet for PreparingWorksheet for PreparingOperating Activities SectionOperating Activities SectionSales $2,211+(-) Decrease (increase) in AR 16Cash received from customers $2,227COGS - Depreciation + SGA $1,971+(-) Increase (decrease) in inventory 80Cash paid to suppliers andemployees $2,051Income taxes (federal / state) $ 60+(-) Incr (Decr) in accum. tax prepay 1Taxes paid $ 61(a)(b)(c)
  • 35. 35Direct Method --Direct Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Investing ActivitiesCash Flow from Investing ActivitiesAdditions to Fixed Assets $(100)Net cash provided (used) byNet cash provided (used) byinvesting activitiesinvesting activities $(100)$(100)
  • 36. 36Direct Method --Direct Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Financing ActivitiesCash Flow from Financing ActivitiesIncrease, notes payable $ ( 5)Increase, long-term debt 77Dividends paid ( 38)Net cash provided (used) byNet cash provided (used) byfinancing activitiesfinancing activities $ 34$ 34
  • 37. 37Direct Method --Direct Method --Statement of Cash FlowsStatement of Cash FlowsIncrease (decrease) in cashIncrease (decrease) in cashand cash equivalentsand cash equivalents $ ( 10)$ ( 10)Cash and cash equivalents, 2002 100Cash and cash equivalents, 2002 100Cash and cash equivalents, 2003 $ 90Cash and cash equivalents, 2003 $ 90Supplemental cash flow disclosuresNet Income $ 91Depreciation 30Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)Net cash provided (used) byNet cash provided (used) byoperating activitiesoperating activities $ 56$ 56
  • 38. 38Cash Flow ForecastingCash Flow ForecastingDetermine the future cash needs of the firmPlan for the financing of these needsExercise control over cash and liquidity ofthe firmA Cash BudgetCash Budget is a forecast of a firm’s futurecash flows arising from collections anddisbursements, usually on a monthly basis.The financial manager is better able toThe financial manager is better able to:
  • 39. 39The Sales ForecastThe Sales ForecastSales representatives project salesfor the period in question (salesunder their control or management).Sales projections are screened andconsolidated for product lines.Product line sales projections areconsolidated into a single forecast.Internal Sales ForecastInternal Sales Forecast
  • 40. 40The Sales ForecastThe Sales ForecastEconomists project overalleconomic and business trends thatwill affect the firm.Expected market share is projectedfor current and new product lines.Product line sales projections areconsolidated into a single forecast.External Sales ForecastExternal Sales Forecast
  • 41. 41BW’s Cash Flow ForecastBW’s Cash Flow ForecastLisa Miller has finalized a cash flowforecast for the first six months of 2004.Lisa is expecting 90% of monthly saleswill be credit sales with 80% of creditsales collected in 30 days, 20% in 60days, and no “bad debts.”Hint: The cash flow forecast will be usedin forecasting the financial statementslater in this chapter.
  • 42. 42Collections and OtherCollections and OtherCash Receipts (Thousands)Cash Receipts (Thousands)SALESSALES NOV DEC JAN FEBCredit Sales, 90%Credit Sales, 90% $193 $212 $154 $135$193 $212 $154 $135Cash Sales, 10%Cash Sales, 10% 2121 2424 1717 1515Total Sales, 100%Total Sales, 100% $214 $236 $171 $150$214 $236 $171 $150CASH COLLECTIONSCASH COLLECTIONSCash sales, currentCash sales, current $ 17 $ 15$ 17 $ 1580% of last month’s 169 123credit sales20% of 2-month-old 39 42credit salesTotal sales receiptsTotal sales receipts $225 $180$225 $180
  • 43. 43SALESSALES MAR APR MAY JUNCredit Sales, 90%Credit Sales, 90% $256 $205 $160 $190$256 $205 $160 $190Cash Sales, 10%Cash Sales, 10% 2828 2323 1818 2121Total Sales, 100%Total Sales, 100% $284 $228 $178 $211$284 $228 $178 $211CASH COLLECTIONSCASH COLLECTIONSCash sales, currentCash sales, current $ 28 $ 23 $ 18 $ 21$ 28 $ 23 $ 18 $ 2180% of last month’s 108 205 164 128credit sales20% of 2-month-old 31 27 51 41credit salesTotal sales receiptsTotal sales receipts $167 $255 $233 $190$167 $255 $233 $190Collections and OtherCollections and OtherCash Receipts (Thousands)Cash Receipts (Thousands)
  • 44. 44Schedule of Projected CashSchedule of Projected CashDisbursements (Thousands)Disbursements (Thousands)DEC JAN FEBPurchasesPurchases $ 39 $ 35 $ 64$ 39 $ 35 $ 64CASH DISBURSEMENTS FOR PURCHASESCASH DISBURSEMENTS FOR PURCHASESAND OPERATING EXPENSESAND OPERATING EXPENSES100% of last month’s100% of last month’s $ 39 $ 35$ 39 $ 35purchasespurchasesWages paidWages paid 90 9490 94Other expenses paidOther expenses paid 34 3434 34Total disbursements (purchasesTotal disbursements (purchasesand operating expenses)and operating expenses) $163 $163$163 $163
  • 45. 45MAR APR MAY JUNPurchasesPurchases $ 53 $ 40 $ 48 $ 50$ 53 $ 40 $ 48 $ 50CASH DISBURSEMENTS FORCASH DISBURSEMENTS FORPURCHASES AND OPERATINGPURCHASES AND OPERATINGEXPENSESEXPENSES100% of last month’s $ 64 $ 53 $ 40 $ 48100% of last month’s $ 64 $ 53 $ 40 $ 48purchasespurchasesWages paidWages paid 111 107 92111 107 92 9292Other expenses paidOther expenses paid 34 34 3434 34 34 3434Total disbursementsTotal disbursements $209 $194 $166$209 $194 $166 $174$174(purchases and(purchases andoperating expenses)operating expenses)Schedule of Projected CashSchedule of Projected CashDisbursements (Thousands)Disbursements (Thousands)
  • 46. 46Schedule of Net CashSchedule of Net CashDisbursements (Thousands)Disbursements (Thousands)JAN FEB MARTotal disbursements forTotal disbursements for $163 $163 $209$163 $163 $209purchases and operatingpurchases and operatingexpensesexpensesCapital expendituresCapital expenditures 70 40 070 40 0Dividend paymentsDividend payments 0 0 90 0 9Income taxesIncome taxes 25 0 025 0 0Total cash disbursementsTotal cash disbursements $258 $203 $218$258 $203 $218
  • 47. 47Schedule of Net CashSchedule of Net CashDisbursements (Thousands)Disbursements (Thousands)APR MAY JUNTotal disbursements forTotal disbursements for $194 $166 $174$194 $166 $174purchases and operatingpurchases and operatingexpensesexpensesCapital expendituresCapital expenditures 0 0 00 0 0Dividend paymentsDividend payments 0 0 100 0 10Income taxesIncome taxes 25 0 025 0 0Total cash disbursementsTotal cash disbursements $219 $166 $184$219 $166 $184
  • 48. 48JAN FEB MARBeginning cash balance $ 90 $ 57 $ 34Beginning cash balance $ 90 $ 57 $ 34Total cash receiptsTotal cash receipts 225 180 167225 180 167Total cash disbursementsTotal cash disbursements 258258 203203 218218Net cash flowNet cash flow $($( 33) $(33) $( 23) $(23) $( 51)51)Ending cash balanceEnding cash balancewithout additional financing $ 57 $ 34 $( 17)without additional financing $ 57 $ 34 $( 17)Projected Net CashProjected Net CashFlows and Cash BalancesFlows and Cash Balances
  • 49. 49APR MAY JUNBeginning cash balance $( 17) $ 19 $ 86Beginning cash balance $( 17) $ 19 $ 86Total cash receiptsTotal cash receipts 255 233 190255 233 190Total cash disbursementsTotal cash disbursements 219219 166166 184184Net cash flowNet cash flow $$ 36 $36 $ 67 $ 667 $ 6Ending cash balanceEnding cash balancewithout additional financing $ 19 $ 86 $ 92without additional financing $ 19 $ 86 $ 92Projected Net CashProjected Net CashFlows and Cash BalancesFlows and Cash Balances
  • 50. 50Range ofRange ofCash-Flow EstimatesCash-Flow EstimatesExamine factors that may influence cashcashdisbursementsdisbursements such as changes in thestate of the economy that impactoperations, capital expenditures, anddividend payments.Examine factors that may influence cashcashreceiptsreceipts such as changes in the state ofthe economy that influence consumerbuying decisions and pricing strategies.
  • 51. 51Management UncertaintyManagement Uncertaintyin Ending Cash Balancesin Ending Cash BalancesENDING CASH BALANCE(thousands)January DistributionPROBABILITYOFPROBABILITYOFOCCURRENCEOCCURRENCE$42$42 $51$51 $60$60 $69$69 $78$78
  • 52. 52Management UncertaintyManagement Uncertaintyin Ending Cash Balancesin Ending Cash BalancesENDING CASH BALANCE(thousands)February DistributionPROBABILITYOFPROBABILITYOFOCCURRENCEOCCURRENCE$4$4 $15$15 $26$26 $37$37 $48$48
  • 53. 53Summary of the RangeSummary of the Rangeof Cash-Flow Estimatesof Cash-Flow EstimatesAllows examination of therelevant factors which maygenerate uncertainty regardingfuture cash flows.Enables management to betterplan for contingencies that willarise than using a single-pointestimate of monthly cash flows.
  • 54. 54ForecastingForecastingFinancial StatementsFinancial Statements(1) Forecasted Income Statement(1) Forecasted Income Statement(2) Forecasted Balance Sheet(2) Forecasted Balance SheetExpected future financial statementsbased on conditions thatmanagement expects to exist andactions it expects to take.Considerations
  • 55. 55Forecasting BW’sForecasting BW’sIncome StatementIncome StatementLisa Miller is forecasting the incomestatement for 2004. She estimates that salessalesfor the 6 months ended June 30 will be$1,222,000$1,222,000. COGSCOGS are estimated from theaverageaverage of years 2001 through 2003of years 2001 through 2003. Selling,Selling,general, and administrative costsgeneral, and administrative costs areforecasted at $34,000 per month$34,000 per month, while theincome tax rate is assumed equal to 40%.Cash dividendsCash dividends and interest expenses areexpected to remain constantremain constant.
  • 56. 56Basket Wonders’ ForecastedBasket Wonders’ ForecastedIncome StatementIncome Statementa. From sales budget.b. Average of 68.7, 71.3,and 72.3% multiplied bynet sales.c. $34,000 x 6 months.d. Assumed to be $29,000.e. Did not change. Six (6)months of dividends =(.5)($38,000) = $19,000.Net SalesNet Salesaa$ 1,222$ 1,222Cost of Goods SoldCost of Goods Soldbb865865Gross Profit $ 357SG&A ExpensesSG&A Expensescc204204EBIT $153 Interest Expensed29 EBT $124 Income Taxes 50EAT $ 74Cash DividendsCash Dividendsee1919Increase in REIncrease in RE $ 55$ 55Basket Wonders Forecasted Statement of Earnings (inBasket Wonders Forecasted Statement of Earnings (inthousands) for Six Months Ending June 30, 2004thousands) for Six Months Ending June 30, 2004
  • 57. 57Basket Wonders’ BalanceBasket Wonders’ BalanceSheet (Asset Side)Sheet (Asset Side)a. From Cash FlowForecast.b. 100% June, 20% May.c. Inv Turnover = 2.5.d. Capital expenditure of$110,000 anddepreciation of$69,000.ASSUMPTIONSCash and C.E.Cash and C.E.aa$ 92$ 92Acct. Rec.Acct. Rec.bb222222InventoriesInventoriescc692692Prepaid Exp 5Accum Tax Prepay 10Current AssetsCurrent Assets $1,021$1,021Fixed Assets (@Cost) 1,140Less: Acc. Depr. (386)Net Fix. AssetsNet Fix. Assetsdd$ 742$ 742Investment, LT 50Other Assets, LT 223Forecasted Balance Sheet (thousands) June 30, 2004Forecasted Balance Sheet (thousands) June 30, 2004
  • 58. 58Basket Wonders’ BalanceBasket Wonders’ BalanceSheet (Liability Side)Sheet (Liability Side)a. Previous balance lessamount paid down.b. 100% of Junepurchases.c. No net change inaccruals.d. Decrease in unpaidwages, salaries, etc.e. Increase in retainedearnings (See 7-56).ASSUMPTIONSNotes PayableNotes Payableaa$$ 226226Acct. PayableAcct. Payablebb5050Accrued TaxesAccrued Taxescc1616Other Accrued Liab.Other Accrued Liab.dd2020Current Liab.Current Liab. $$312312 Long-Term Debt530 Shareholders’Equity Com. Stock ($1par) 200 Add Pd in Capital729 RetainedRetainedEarningsEarningsee265265 TotalTotalEquityEquity $$1,1941,194Forecasted Balance Sheet (thousands) June 30, 2004Forecasted Balance Sheet (thousands) June 30, 2004