BBF3034 – Analysis and Valuation of Financial Statements Semester 1 23/24

Tutorial Week 13 – Topic 8

Topic 8
Textbook Chapter 10

Problem – 10.2

Selected financial data of Future Technologies, Inc., at December 31, Year 1, are
shown below:

Cash $ 42,000 Accounts payable $ 78,000

Accounts receivable 90,000 Notes payable 21,000
Inventory 39,000 Accrued taxes 10,800
Fixed assets 120,000 Capital stock 120,000
Accumulated
25,800 Retained earnings 35,400
depreciation

The following additional information is available for the year ended December 31,
Year 1:
Sales $450,000 Depreciation $15,000
Cost of goods sold (excluding
312,000 Net income 12,000
depreciation)
Purchases 210,000

For Year 2, Future Technologies anticipates a 5% sales growth. To counterbalance

this lower than expected growth rate, the company implements cost-cutting strategies
to reduce cost of goods sold by 2% from the Year 1 level. All other expenses are
expected to increase by 5%. Expected net income for Year 2 is $20,000. Ending Year
2 inventory is estimated at $90,000 and there is no expected balance in accrued taxes.
The company requires $175,000 to buy new equipment in Year 2. The minimum
desired cash balance is $30,000. The company offers a discount of 2% of sales if
payment is received in 10 days. It is expected that 10% of sales take advantage of this
discount, while the remaining 90% are collected (on average) in 60 days.

Required:
Prepare a what-if analysis of cash needs (cash forecast) for Year 2. Will Future
Technologies need to borrow money?

Questions are from Subramanyam, K. R., Financial Statement Analysis, 11th Edition,
McGraw Hill

SR 1
BBF3034 – Analysis and Valuation of Financial Statements Semester 1 23/24

SR 2