Umali, Jenny Shane P.

BSA 3

Financial Management

REVIEW QUESTIONS AND PROBLEMS:

Answers:

1. The pro-forma financial statements and cash budget enable the firm to determine its future
level of asset needs and the associated financing that will be required. Furthermore, one can
track actual events against the projections. Bankers and other lenders also use these financial
statements as a guide in credit decisions.
2. The collections and purchase schedules measure the speed at which receivables are collected
and purchases are paid. To the extent collections do not cover purchasing costs and other
financial requirements, the firm must look to borrowing to cover the deficit.
3. The more rapid the turnover of inventory, the greater the need for purchases and replacement.
Rapidly turning inventory makes for somewhat greater ease in foreseeing the future
requirements and reduces the cost of carrying inventory.
4. Rapid growth in sales and profits is often associated with rapid growth in asset commitment. A
$100,000 increase in sales may cause a $50,000 increase in assets, with perhaps only $10,000 of
the new financing coming from profits. It is very seldom that incremental profits from sales
expansion can meet new financing needs.
5. Level production in a cyclical industry has the advantage of allowing for the maintenance of a
stable work force and reducing inefficiencies caused by shutting down production during slow
periods and accelerating work during crash production periods. A major drawback is that a large
stock of inventory may be accumulated during the slow sales period this inventory may be
expensive to finance with an associated danger of obsolescence.
6. The percent-of-sales forecast is only as good as the functional relationship of assets and
liabilities to sales. To the extent that past relationships accurately depict the future, the percent-
of-sales method will give values that reasonably represent the values derived through the pro-
forma statements and the cash budget.
7. Define each of the following terms:
a) Sales Forecast- an expression of expected sales revenue. A sales forecast estimates how
much your company plans to sell within a certain time period (like quarter or year).
b) Projected financial statement method- incorporate current trends and expectations to
arrive at a financial picture that management believes it can attain as of a future date.
At a minimum, projected financial statements will show a summary-level income
statement and balance sheet.
c) Spontaneously generated funds- Funds that are obtained automatically from normal
operations, and they include increases in accounts payable and accruals.
d) Dividend payout ratio- shows how much of a company's earnings after tax (EAT) are paid
to shareholders. It is calculated by dividing dividends paid by earnings after tax and
multiplying the result by 100.
 e) Pro forma financial statement- A pro forma financial statement leverages hypothetical
data or assumptions about future values to project performance over a period that
hasn't yet occurred.
f) Additional funds needed (AFN); AFN formula- funds that a firm must raise externally
through new borrowing or by selling new stock by borrowing from bank (notes pay) and
issuing long-term bonds. The formula is, AFN = Projected increase in assets –
spontaneous increase in liabilities – any increase in retained earnings.
g) Capital intensity ratio- a metric that shows you how much capital is needed to generate
$1 of revenue. It is a ratio analysis tool that companies often use to show how well the
business is utilizing its assets. It will show how well a company is generating revenues
from its assets.
h) Lumpy assets- an asset that cannot be acquired in small increments, but must be
obtained in large, discrete units.
i) Financing feedback- they do not reflect the fact that interest must be paid on the debt
used to help finance the AFN, and that dividends will be paid on the new shares of
common stock.
8. Budget is a detailed plan for the future, quantitative plan for purchase and sales and associated
financial resources (cash). Budgetary control involves using budgets to increase the likelihood
that all parts of the organization work together.
9. Some of the benefits of budgeting-
A. Communicates management's plan throughout the organization.
B. Forces mangers to plan for future
C. Budgets provide a means for allocating resources to part of the organization where they can
be used most effectively
D. Process can uncover bottlenecks before they occur
E. Can coordinate the activates of the entire organization
F. Define goals and objectives, benchmarking and performance evaluation various functional
areas, and also includes budgeted financial statements, a cash forecast, and a financing plan.
10. Master budget- composed of smaller budgets: sales/cash receipts, production/raw materials,
direct labor, manufacturing overhead and cash disbursements
Selling and administrative budget/cash disbursements
Master budget contains a budgeted income statement and a balance sheet.
The final piece is the cash budget and to pay off any loans.
11. The sale forecast is the starting point in budgeting because sales impacts/ drives virtually every
aspect of a firm's activities because sales will determine revenues and direct costs. Revenue and
costs are critical to budgeting and cash flows. Sales forecasting forms the backbone of
marketing.
12. No. Planning and control are different, although related concepts. Planning involves developing
goals and developing budgets to achieve those goals. Control, by contrast, involves the means
by which management attempts to ensure that the goals set down at the planning
stage are attained.
13. The flow of budgeting information moves in two directions—upward and downward. The initial
flow should be from the bottom of the organization upward. Each person having responsibility
over revenues or costs should prepare the budget data against which his or her subsequent
 performance will be measured. As the budget data are communicated upward, higher-level
managers should review the budgets for consistency with the overall goals of the organization
and the plans of other units in the organization. Any issues should be resolved in discussions
between the individuals who prepared the budgets and their managers. All levels of an
organization should participate in the budgeting process—not just top management or the
accounting department. Generally, the lower levels will be more familiar with detailed, day-to-
day operating data, and for this reason will have primary responsibility for developing the
specifics in the budget. Top levels of management should have a better perspective concerning
the company's strategy.
14. The direct labor budget can be used to forecast work force labor needs, and allowing the
avoidance of erratic swings.
15. The principal purpose of the cash budget is NOT to see how much cash the company will have in
the bank at the end of the year. Although this is one of the purposes of the cash budget, the
principal purpose is to provide information on probable cash needs during the budget period, so
that bank loans and other sources of financing can be anticipated and arranged well in advance.

PROBLEMS:
PROBLEM 1:
A.
FEBRUARY MARCH APRIL MAY JUNE
Sales 60000 70000 75000 95000 110000
Credit Sales 5400 63000 67500 85500 99000
COLLECTIONS
Cash
10% of sales 6000 7000 7500 9500 11000
60% 1st month after sale 37800 40500 51300
40% 2nd month after sale 21600 25200 27000
TOTAL RECEIPTS 66900 75200 89300

B.
Receivables end of June: 99000
90% of June sales 34300
40% of May credit sales 133200
PROBLEM 2:
January February March April May
Cash 4200 6000 7800 6600 5400
Credit 9800 11400 18200 15400 12600
Collections:
Cash 7800 6600 5400
40% on the following month 5600 7280 6160
60% on the second month 5880 8400 10920
Total Collections 19,280 22,280 22,480

Cash budget
Collections 19,280 22,280 22,480
− Payments 21,300 19,100 22,400
Cashflow -2,020 3,180 80
+ Beginning Cash Balance 2,000 2,000 2,000
Cumulative Cash Balance -20 5,180 2,080
Loan (Repayment) 2,020 -3,180 -80
Cumulative Loan Balance 4,020 840 760
Ending Cash Balance 2,000 2,000 2,000

PROBLEM 3:

Requirement A
April May June
Cash Sales 10% 10000 12000 11000
Collection of sale in prior month 70% 50400 63000 75600
Collection of sales in two months prior 30% 16200 21600 27000
Total cash collections 76600 96600 113600

Requirement B

Uncollected Sales in February 16200

Uncollected Sales in March 72000
Accounts Receivable April 1, 20x4 88200
Sales of the quarter 330000
Collections for the quarter -286800
Accounts Receivable June 30, 20x4 131400
PROBLEM 4:

a. Preparation of schedule of expected cash collections from sales, by month and in total, for the second quarter

Month Cash Collections

April 369000
May 456000
June 457000
TOTAL 1,282,000

b. Computation of accounts receivable as of June 30.

Account receivable at June 30 = Cash collections of July and August

Account receivable at June 30 = 174,000 + 19,000
Account receivable at June 30 = 193,000

PROBLEM 5:

Unit volume (3,000 x 1.20) 3,600

Price ( 200 ₱ x 1.10) 220
Total sales 792000
Returns (5%) 39600
Net sales 752,400

PROBLEM 6:

Projected sales 40,000 units

Desired ending inventory 6,000 (15% x 40,000)
Beginning inventory 8,500
Units to be produced 37,500

PROBLEM 7:

Projected sales 12,000 units (8,000 x 1.50)

Desired ending inventory 600 (5% x 12,000)
Beginning inventory 400
Units to be produced 12,200
PROBLEM 8:

Projected sales 50,000 units

Desired ending inventory 5,600 (40% x 14,000)
Beginning inventory 14,000
Units to be produced 41,600

PROBLEM 9:

September October November December

Credit sales 50000 40000 35000 60000
20% Collected in month of sales 8000 7000 12000
70% Collected in month after sales 35000 28000 24500
Total cash receipts 43000 35000 36500