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Cash Flow & Financial Planning Guide

Grenoble Enterprises' cash budget for May through July is summarized as follows: 1) Cash balances fluctuate from month to month due to timing differences between sales, collections, and expenses. 2) The minimum $5,000 cash balance is maintained each month. Red Queen Restaurants' 2013 financial plans are summarized as: 1) Pro forma income statement estimates 2013 sales at $900,000 with net income of $60,000. 2) Pro forma balance sheet as of 12/31/13 estimates total assets of $700,000 with no external financing required.

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49 views2 pages

Cash Flow & Financial Planning Guide

Grenoble Enterprises' cash budget for May through July is summarized as follows: 1) Cash balances fluctuate from month to month due to timing differences between sales, collections, and expenses. 2) The minimum $5,000 cash balance is maintained each month. Red Queen Restaurants' 2013 financial plans are summarized as: 1) Pro forma income statement estimates 2013 sales at $900,000 with net income of $60,000. 2) Pro forma balance sheet as of 12/31/13 estimates total assets of $700,000 with no external financing required.

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MM5007 FINANCIAL MANAGEMENT

CASH FLOW AND FINANCIAL PLANNING

1. Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June,
and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May
1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and
interpret a cash budget for the months of May, June, and July.
1) The firm makes 20% of sales for cash, 60% are collected in the next month, and the remaining 20%
are collected in the second month following sale.
2) The firm receives other income of $2,000 per month.
3) The firm’s actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for
the months of May through July, respectively.
4) Rent is $3,000 per month.
5) Wages and salaries are 10% of the previous month’s sales.
6) Cash dividends of $3,000 will be paid in June.
7) Payment of principal and interest of $4,000 is due in June.
8) A cash purchase of equipment costing $6,000 is scheduled in July.
9) Taxes of $6,000 are due in June.

2. Red Queen Restaurants wishes to prepare financial plans. Use the information provided below to prepare
the financial plans. The following financial data are also available:
1) The firm has estimated that its sales for 2013 will be $900,000.
2) The firm expects to pay $35,000 in cash dividends in 2013.
3) The firm wishes to maintain a minimum cash balance of $30,000.
4) Accounts receivable represent approximately 18% of annual sales.
5) The firm’s ending inventory will change directly with changes in sales in 2013.
6) A new machine costing $42,000 will be purchased in 2013. Total depreciation for 2013 will be
$17,000.
7) Accounts payable will change directly in response to changes in sales in 2013.
8) Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.
9) Marketable securities, other current liabilities, long-term debt, and common stock will remain
unchanged.
a. Prepare a pro forma income statement for the year ended December 31, 2013, using the percent-of-
sales method.
b. Prepare a pro forma balance sheet dated December 31, 2013, using the judgmental approach.
c. Analyze these statements, and discuss the resulting external financing required.
Red Queen Restaurants Income Statement
for the Year Ended December 31, 2012
Sales revenue $ 800,000
Less: Cost of goods sold 600,000
Gross profits 200,000
Less: Operating expenses 100,000
Net profits before taxes 100,000
Less: Taxes (rate 40%) 40,000
Net profits after taxes 60,000
Less: Cash dividends 20,000
To retained earnings $ 40,000

Red Queen Restaurants Balance Sheet December 31, 2012

Assets Liabilities and Stockholders’ Equity


Cash $ 32,000 Accounts payable $ 100,000
Marketable securities 18,000 Taxes payable 20,000
Accounts receivable 150,000 Other current liabilities 5,000
Inventories 100,000 Total current liabilities 125,000
Total current assets 300,000 Long-term debt 200,000
Net fixed assets 350,000 Total Liabilities 325,000
Total assets $ 650,000 Common stock 150,000
Retained earnings 175,000
Total liabilities and
stockholders’ equity $ 650,000

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