I really do not understand how to do this or set this up. Can you please help me?
Pro Forma Statements
a. Mike Epstein is very optimistic because sales for his feed store are expected to double from $800,000 to $1,600,000 next year. His net assets (Assets – Liabilities) will remain at 50% of sales. The company will enjoy a 10 percent return on total sales. He will start the year with $120,000 in the bank and is bragging about the nice fishing boat he will soon be able to buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50% of the sales increase) and add in profit.
b. In the above problem, if there had been no increase in sales and all other facts were the same, what would Mike’s ending cash balance be? What lesson does the solution of the two problems illustrate?
c. Buzz Air’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) $420,000 $220,000
May (actual) 390,000 210,000
June (forecast) 400,000 200,000
July (forecast) 350,000 250,000
August (forecast) 410,000 300,000
September (forecast) 430,000 220,000
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 later. Buzz Air pays for 40 percent of its purchases in the month after purchase and 60 percent two months after.
Labor expense equals 10 percent of the current month’s sales. Overhead expense equals $15,000 per month. Interest payments of $40,000 are due in June and September. A cash dividend of $20,000 is scheduled to be paid in June. Tax payments of $35,000 are due in June and September. There is a scheduled capital outlay of $300,000 in September.
Buzz Air’s 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)
a. To compute Mike Epstein's likely cash balance or deficit for the end of the year, we need to follow these steps:
1. Start with the beginning cash balance of $120,000.
2. Determine the increase in assets due to the sales increase. Since Mike's net assets will remain at 50% of sales, the increase in assets is equal to 50% of the increase in sales.
Sales increase = $1,600,000 - $800,000 = $800,000
Asset increase = 50% x $800,000 = $400,000
3. Add the asset increase to the beginning cash balance.
New cash balance = $120,000 + $400,000 = $520,000
4. Calculate the profit based on the 10% return on total sales.
Profit = 10% x $1,600,000 = $160,000
5. Finally, add the profit to the new cash balance.
Final cash balance = $520,000 + $160,000 = $680,000
Based on the calculations, Mike's likely cash balance for the end of the year is $680,000.
b. If there had been no increase in sales, but all other facts remained the same, we can calculate Mike's ending cash balance using the same steps as in part (a).
1. Start with the beginning cash balance of $120,000.
2. Since there is no increase in sales, the asset increase is also zero.
3. Add the asset increase (zero) to the beginning cash balance.
New cash balance = $120,000 + 0 = $120,000
4. Calculate the profit based on the 10% return on total sales.
Profit = 10% x $800,000 = $80,000
5. Finally, add the profit to the new cash balance.
Final cash balance = $120,000 + $80,000 = $200,000
The solution of the two problems illustrates that an increase in sales has a significant impact on the cash position of a company. In the first scenario with increased sales, Mike's cash balance is $680,000, whereas in the second scenario with no sales increase, the cash balance is only $200,000.
c. To prepare a schedule of monthly cash receipts, monthly cash payments, and a complete monthly cash budget for Buzz Air for June through September, we need to follow these steps:
1. Start with the ending cash balance in May, which is $20,000.
2. For each month, calculate cash receipts:
- Calculate cash sales as 10% of the forecasted sales for that month.
- Calculate credit collections for that month as 20% of the sales made two months prior and 80% of the sales made one month prior. Add these two amounts together.
- Add the cash sales and credit collections to get the total cash receipts for the month.
3. For each month, calculate cash payments:
- Calculate payments for purchases as 40% of the purchases made one month prior and 60% of the purchases made two months prior. Add these two amounts together.
- Calculate labor expenses as 10% of the current month's sales.
- Add labor expenses, payments for purchases, overhead expenses, interest payments, tax payments, and any other expenses to get the total cash payments for the month.
4. Calculate the net cash flow for each month by subtracting cash payments from cash receipts.
5. Calculate the new cash balance for each month by adding the net cash flow to the previous month's ending cash balance.
6. Determine if there is excess cash (above $50,000) or a cash shortfall (less than $15,000) for each month.
- If there is excess cash, use it to buy marketable securities.
- If there is a cash shortfall, sell marketable securities first before borrowing funds.
7. Repeat steps 2-6 for each month from June through September.
8. Continue the calculations until September to determine the final cash balance and any borrowing or repayment needs.
Note: The calculations can be complex, involving multiple steps for each month. It is recommended to use a spreadsheet or financial software to perform these calculations efficiently.