Problem 8. This and the following two problems demonstrate that pro forma forecasts, cash budgets and cash flow forecasts all yield the same estimated need for external financing provided you dont make any mistakes. For problems 8, 9, and 10, you may ignore the effect of added borrowing on interest expense.

The treasurer of Pepperton, Inc., a wholesale distributor of household appliances, wants to estimate his companys cash balances for the first three months of 2009. Using the information below, construct a monthly cash budget for Pepperton for January through March 2009. Does it appear from your results that the treasurer should be concerned about investing excess cash or looking for a bank loan?

Pepperton Selected Information

Sales (20 percent for cash, the rest on 30- day credit terms):

2008 Actual

October $360,000 November 420,000 December 1,200,000

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2009 Projected

January $600,000

February 240,000

March 240,000

Purchases (all on 60- day terms):

2008 Actual

October $510,000

November 540,000

December 1,200,000

2009 Projected

January $300,000

February 120,000

March 120,000

Wages payable monthly $180,000

Principal payment on debt due in March 210,000

Interest due in March 90,000

Dividend payable in March 300,000

Taxes payable in February 180,000

Addition to accumulated depreciation in March 30,000

Cash balance on January 1, 2009 $300,000

Minimum desired cash balance 150,000

Problem 9. Continuing problem 8, Peppertons annual income statement and balance sheet for December 31, 2008 appear below. Additional in-formation about the companys accounting methods and the treasurers expectations for the first quarter of 2009 appear in the footnotes.

Pepperton Annual

Income Statement

December 31, 2008 ($ thousands)

Net sales $6,000

Cost of goods sold1 3,900

Gross profits 2,100

Selling and administrative expenses2 1,620

Interest expense 90

Depreciation3 90

Net profit before tax 300

Tax (33%) 99

Net profit after tax $ 201

Balance Sheet

December 31, 2008 ($ thousands)

Assets

Cash $300

Accounts receivable 960

Inventory 1,800

Total current assets $3,060

Gross fixed assets 900

Accumulated depreciation 150

Net fixed assets 750

Total assets $3,810

Liabilities

Bank loan $0

Accounts payable 1,740

Miscellaneous accruals4 60

Current portion long- term debt5 210

Taxes payable 300

Total current liabilities $2,310

Long- term debt 990

Shareholders equity 510

Total liabilities and equity $3,810

1. Cost of goods sold consists entirely of items purchased in first quarter.

2 Selling and administrative expenses consist entirely of wages.

3 Depreciation is at the rate of $30,000 per quarter.

4 Miscellaneous accruals are not expected to change in the first quarter.

5 $210 due March 2009. No payments for remainder of year.

a. Use this information and the information in problem 8 to construct a pro forma income statement for the first quarter of 2009 and a pro forma balance sheet for March 31, 2009. What is your estimated external financing need for March 31?

b. Does the March 31, 2009, estimated external financing equal your cash surplus (deficit) for this date from your cash budget in problem 8? Should it?

c. Do your pro forma forecasts tell you more than your cash budget does about Peppertons financial prospects?

d. What do your pro forma income statement and balance sheet tell you about Peppertons need for external financing on February 28, 2009?

Problem 10. Based on your answer to question 9, construct a first- quarter 2009 cash flow forecast for Pepperton.

Note: Problem 8 has been answered, but the answer to problem 9 is incomplete and problem 10 has not been answered at all...