Financial Management Chapter 4 Case After performing the ratio analysis, developing common-size financial statements, and examining return on equity by the DuPont method, Warren Lynch presented his findings and recommendations for CompU to Bill Jobs. Warren stated that the large decrease in cash and the use of short-term debt concerned him, and recommended doing cash and profit planning in order to make sound financing and expansion decisions. He also pointed out that the cost of goods sold was increasing and needed further analysis. Bill agreed, and thanked Warren for his hard work. Bill said he would talk to their suppliers and determine what was driving the increased costs while Warren started the cash and profit planning process. Warren said he first needed to put together the cash flow statement to see what was causing the decrease in cash, and then develop cash budgets and pro forma financial statements to forecast future profits and financing required.

1. Using the financial statements below, create CompUs cash flow statement for 2009 and determine what caused the decrease in cash from 2008.

2. Using the information given, develop cash budgets for the first three months of 2010, including schedules of cash receipts and disbursements. In which months will financing be required? 3. Use the additional data to prepare the pro forma income statement and balance sheet for 2010. How much additional financing will CompU need?

Information for cash budgets:

Monthly forecasted sales and purchases:

Year Month Sales Forecast Purchases 2009 November $130,000 (actual) $ 98,000 (actual) December 120,000 (actual) 90,000 (actual) 2010 January 155,000 116,000 February 140,000 105,000 March 140,000 105,000 April 140,000 105,000 May 125,000 90,000 June 100,000 70,000 July 100,000 70,000 August 165,000 115,000 September 165,000 115,000 October 160,000 112,000 November 160,000 112,000 December 150,000 105,000 Total $1,700,000 $1,220,000

1. CompU makes 20% of all sales for cash, collects 50% in the next month, and collects 30% in the second month following the sale.

2. The firm pays for 40% of its purchases in month they are made, and the remaining 60% are paid for in the month after.

3. Other cash inflows are expected to be $10,000 in February.

4. Wages and salaries are 10% of the previous months sales.

5. Rent, utilities, and other miscellaneous expenses total $4,000 per month.

6. Interest payments of $10,000 as well as a principal payment of $20,000 must be paid in March, June, September, and December.

7. Taxes of $10,000 are due in January, $15,000 in April, and $20,000 in July, and $30,000 in October.

8. Warren decides that a minimum cash balance of $25,000 should be maintained.

9. Dividends of $2,500 will be paid in March, June, September, and December.

Additional information for pro forma financial statements:

1. Cash on the balance sheet will equal the minimum cash balance Warren wants maintained.

2. Additional fixed assets of $320,000 will be purchased in 2010.

3. Warren wants to issue long-term debt of $175,000 and use the proceeds to pay down notes payable.

4. Accounts receivable, inventory, accounts payable, and accruals will change in direct response to the change in sales.

5. Common stock will remain unchanged.

6. The cost of goods sold includes $10,000 of fixed costs each month.

7. Depreciation expense will equal $75,000 for 2010.

8. Interest expense equals the quarterly interest payments.

9. CompUs tax rate is 40%.

CompU, Inc.

Comparative Balance Sheets

December 31, 2008 December 31, 2009

Cash $ 50,000 $ 10,000

Accounts Receivable 100,000 120,000

Inventory 150,000 150,000

Total Current Assets $ 300,000 $ 280,000

Fixed Assets 1,200,000 1,480,000

Less: Accumulated Depreciation (500,000) (560,000)

Total Fixed Assets $ 700,000 $ 920,000

Total Assets $1,000,000 $1,200,000

Liabilities and Stockholders Equity

Accounts Payable $ 40,000 $ 42,000

Accruals 20,000 24,000

Notes Payable 50,000 224,000

Total Current Liabilities $ 110,000 $ 290,000

Long-term debt 200,000 200,000

Common Stock 200,000 200,000

Retained Earnings 490,000 510,000

Total Liabilities and Stockholders Equity $1,000,000 $1,200,000

CompU, Inc.

Income Sheets

December 31, 2008 December 31, 2009

Sales $1,000,000 $1,200,000

Cost of Goods Sold 675,000 900,000

Gross Profit 325,000 300,000

Operating Expenses:

S, G, & A 100,000 114,000

Depreciation 50,000 60,000

Total Operating Expenses 150,000 174,000

Operating Profit 175,000 126,000

Interest Expense 25,000 39,000

Net income before taxes 150,000 87,000

Taxes 60,000 34,800

Net income after taxes 90,000 52,200