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  • Quiz #2 - CH 4 & 5: Question 1 (48 Marks)

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    The document provides sales and purchase forecasts for Enterprise Ltd over 5 months. It also provides information on accounts receivable payment terms and cash on hand. The questions ask to [1] prepare a schedule of cash receipts for the next 3 months, [2] prepare a cash budget for the same period, and [3] calculate any outstanding debt repayment. The second document provides the income statement for Sterling Tire Company for 2018. It includes their sales, costs, contribution margin, fixed costs, EBIT, interest, taxes and earnings. The questions calculate [1] the degree of operating leverage, [2] the degree of financial leverage, [3] the degree of combined leverage, and [4] whether

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    Quiz # 2

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    The document provides sales and purchase forecasts for Enterprise Ltd over 5 months. It also provides information on accounts receivable payment terms and cash on hand. The questions ask to [1] prepare a schedule of cash receipts for the next 3 months, [2] prepare a cash budget for the same period, and [3] calculate any outstanding debt repayment. The second document provides the income statement for Sterling Tire Company for 2018. It includes their sales, costs, contribution margin, fixed costs, EBIT, interest, taxes and earnings. The questions calculate [1] the degree of operating leverage, [2] the degree of financial leverage, [3] the degree of combined leverage, and [4] whether

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    18 views2 pages

    Quiz #2 - CH 4 & 5: Question 1 (48 Marks)

    Uploaded by

    Jam
    The document provides sales and purchase forecasts for Enterprise Ltd over 5 months. It also provides information on accounts receivable payment terms and cash on hand. The questions ask to [1] prepare a schedule of cash receipts for the next 3 months, [2] prepare a cash budget for the same period, and [3] calculate any outstanding debt repayment. The second document provides the income statement for Sterling Tire Company for 2018. It includes their sales, costs, contribution margin, fixed costs, EBIT, interest, taxes and earnings. The questions calculate [1] the degree of operating leverage, [2] the degree of financial leverage, [3] the degree of combined leverage, and [4] whether

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    © All Rights Reserved
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    of 2

    Quiz #2 - Ch 4 & 5

    Question 1 (48 marks)


    Enterprise Ltd has forecast its sales revenues and inventory purchases for the last five
    Sales Purchases
    August $ 27,000 $ 20,000
    September $ 16,000 $ 17,000
    October $ 28,000 $ 29,000
    November $ 39,000 $ 28,000
    December $ 30,000 $ 28,000

    More information is below. In addition, its minimum required cash balance is $5,000. If
    there is a cash balance in excess of $5,000, Enterprise Ltd will pay down any outstanding debt (if applicable).

    Proportion of sales on credit 80%


    Accounts receivable collected month after sale 75%
    Accounts receivable collected two months after sale 15%
    Accounts receivable nerer collected (bad debts) 10%
    Purchases are paid for 1 month after they occur
    Cash on hand at September 30 $ 6,000
    Outstanding debt at September 30 $ 2,000

    a) Prepare a schedule of cash receipts for October, November, and December.


    b) Prepare a cash budget for the same period.

    August September October November December


    Sale $ 27,000 $ 16,000 $ 28,000 $ 39,000 $ 30,000

    Credit 80 % 21600 12800 22400 31200 24000

    Collection Cash Sale 5600 7800 6000


    75% In Following Month 9600 16800 23400
    15% In Second Month 3240 1920 3360
    Total Collection 18440 26520 32760

    Cash Budget
    Cash receipts 18440 26520 32760
    Cash payments 17000 29000 28000
    Net cash flow $ 1,440.00 $ (2,480.00) $ 4,760.00
    Beginning cash balance 6000 5440 2960
    Cumulative cash balance $ 7,440.00 $ 2,960.00 $ 7,720.00
    Monthly loan or (repayment) (2000) 0 0
    Cumulative loan balance 0 0 0
    Ending cash balance $ 5,440.00 $ 2,960.00 $ 7,720.00

    Still due Bad debt not collected : Bad Debts :


    To be collected from August Sale = (21,600 ) 10 % = $ 2,160.00

    To be collected from September Sale = (12,800 ) 10 % = 1280.00


    Total Bad Debts = $ 3,440.00
    The Sterling Tire Company’s income statement for 2018 is below:
    STERLING TIRE COMPANY
    Income Statement
    Year ended December 31, 2018
    Sales 36,000 tires @ $ 54 each 1,944,000
    Less: Variable costs 36,000 tires @ $ 36 each 1,296,000
    Contribution Margin 648,000
    Less: Fixed cost 250,000
    Earnings before interest and taxes (EBIT) 398,000
    Interest 80,000
    Earnings 318,000
    Income tax 95,400
    Earnings $222,600
    Given this income statement, compute the following to two decimal places.

    a) Degree of operating leverage.


    b) Degree of financial leverage.
    c) Degree of combined leverage.
    d) Does financial or operating leverage have the greater impact?

    Solution :

    Q= $ 36000 P = $ 54 VC = $ 36 FC = $ 250,000 I = $ 80,000

    a) Degree of operating leverage.

    Q (P- VC) $ 36000 ( 54 - 36 )


    DOL ͇ ͇
    Q (P- VC) - FC $ 36000 ( 54 - 36 ) - $ 250,000

    $ 36,000 ( 18 ) $648,000.00
    ͇
    $ 36,000 (18) - $ 250,000 $ 648,000.00 - $ 250,000.00

    $648,000.00
    1.63x
    $398,000.00

    b) Degree of financial leverage.

    EBIT $398,000.00
    DFL ͇ ͇
    EBIT - I $ 398,000.00 - 80,000.00

    $398,000.00
    ͇ 1.3x
    $318,000.00

    c) Degree of combined leverage.

    Q ( P- VC ) $ 36,000.00 (54-36)
    DCL ͇ ͇
    Q ( P- VC) - FC - I $36000.00 (54-36) -250,000.00 - 80,000.00

    $648,000 $648,000.00
    =
    $ 648,000.00 - $ 250,000.00 - $ 80,000.00 $318,000.00

    2.04

    d) Does financial or operating leverage have the greater impact?

    Ans : operating leverage have the greater impact

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