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Required: Cash budget (by quarter) and Pro Forma Income Statement (by quarter and for the year) SCENARIO #1: BASE CASE The following planning assumptions should

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Required:

  1. Cash budget (by quarter) and Pro Forma Income Statement (by quarter and for the year)
SCENARIO #1: BASE CASE The following planning assumptions should be used in your BASE CASE BUDGET SCENARIO. Product Listing Sales Forecast Assumptions Product Volumes Selling Price Year 2 Year 2 Q1 Year 2 Q2 Year 2 Q3 04 Year 3 Q1 1 oz Sage $2.80 1,000 1,540 1,360 900 500 3 oz Clover $8.00 7,150 9,461 7,024 6,560 4.825 Assumptions for Cash Collections from Customers Customers pay 60% in cash, 40% credit; All credit sales are collected in following quarter Uncollectible accounts are negligible and thus ignored Planned Inventory Levels/Inventory Costs Assumptions At the end of each quarter, HB wants to have on hand an inventory of items valued at $20,000 (510 units of 1 oz Sage and 3,393 units of 3 oz Clover) plus 80% of the expected cost of goods sold for the following quarter COGS averages 70% of Gross Sales on each product Assumptions for Cash Disbursements for Purchases Purchases ares 50% in cash, 50% credit; All credit purchases are paid for in the following quarter The company does not currently receive favorable terms from its suppliers; therefore, no discounts are taken Operating Budget (through EBIT) Assumptions Revenue See sales forecast assumptions above Cost of Goods Sold See planned inventory levels/inventory costs assumptions above Wages $2,500 each quarter; paid as incurred Rent $2,000 each quarter; paid as incurred Depreciation Company uses straight-line depreciation; all depreciable assets (e.g., equipment) have 20-year useful lives with no salvage values; Annual depreciation is prorated to quarters equally Insurance The company prepays its annual insurance premium ($800) on Jan 1; insurance is prorated to quarters equally Commissions Commissions are 15% of gross sales; company pays all commissions on a one quarter-lag Miscellaneous Expenses Miscellaneous expenditures are 5% of gross sales; paid as incurred each quarter Other Cash Flow Assumptions Maintain a minimum cash balance of $10,000 at end of each quarter Use short-term loans to meet cash needs and to meet minimum cash balance; invest in short term marketable securities with excess cash so as not to exceed minimum cash balance Borrow no more cash than necessary, repay as promptly as possible Borrow/Repay loans or Invest/Sell securities in increments of $1,000 Borrowing/Repayments occur at the beginning of each quarter in question: Investing Selling securities occurs at the beginning of each quarter in question Accrue simple interest at the end of each quarter on outstanding loan balances; interest is paid in the following quarter: 16% annual rate (or 4% each quarter) Accrue simple interest at the end of each quarter on securities held; interest is received in the following quarter, 8% annual rate (or 2% each quarter) Accrue taxes at 30% on Earnings Before Taxes (EBT); Accrued taxes are remitted to governing bodies in the following quarter; for quarters with negative EBT, assume no taxes The company purchased a new, $3000 depreciable asset on Jan 1, Year 2 with cash. (See EBIT budget assumptions for depreciation expense requirements on this asset.) Prior Year (12/31/Year 1) Balance Sheet Assets Liabilities + Equity Cash $10,000 Accounts Payable $16,800 Marketable Securities $0 Interest Payable $0 Interest Receivable $0 Commissions Payable $6,000 Accounts Receivable $16,000 Short-term Notes Payable $0 Inventory $48,000 Income Taxes Payable $0 Prepaid Insurance $0 $75,400 Owner's Equity (Contributed + Earned Capital) Equipment, Gross $37,000 Accumulated Depreciation ($12,800) Balance Sheet Assumptions Assume that there is no additional equity contributed during Year 2; as such, the company will only increase the equity account via earned capital (1.e., retained earnings) Break-even Assumptions Calculate a sales mix based on units Assume wages, rent, other administrative expenses, and depreciation are fixed costs; assume cost of goods sold, commissions, and miscellaneous expenses are variable costs SCENARIO #1: BASE CASE The following planning assumptions should be used in your BASE CASE BUDGET SCENARIO. Product Listing Sales Forecast Assumptions Product Volumes Selling Price Year 2 Year 2 Q1 Year 2 Q2 Year 2 Q3 04 Year 3 Q1 1 oz Sage $2.80 1,000 1,540 1,360 900 500 3 oz Clover $8.00 7,150 9,461 7,024 6,560 4.825 Assumptions for Cash Collections from Customers Customers pay 60% in cash, 40% credit; All credit sales are collected in following quarter Uncollectible accounts are negligible and thus ignored Planned Inventory Levels/Inventory Costs Assumptions At the end of each quarter, HB wants to have on hand an inventory of items valued at $20,000 (510 units of 1 oz Sage and 3,393 units of 3 oz Clover) plus 80% of the expected cost of goods sold for the following quarter COGS averages 70% of Gross Sales on each product Assumptions for Cash Disbursements for Purchases Purchases ares 50% in cash, 50% credit; All credit purchases are paid for in the following quarter The company does not currently receive favorable terms from its suppliers; therefore, no discounts are taken Operating Budget (through EBIT) Assumptions Revenue See sales forecast assumptions above Cost of Goods Sold See planned inventory levels/inventory costs assumptions above Wages $2,500 each quarter; paid as incurred Rent $2,000 each quarter; paid as incurred Depreciation Company uses straight-line depreciation; all depreciable assets (e.g., equipment) have 20-year useful lives with no salvage values; Annual depreciation is prorated to quarters equally Insurance The company prepays its annual insurance premium ($800) on Jan 1; insurance is prorated to quarters equally Commissions Commissions are 15% of gross sales; company pays all commissions on a one quarter-lag Miscellaneous Expenses Miscellaneous expenditures are 5% of gross sales; paid as incurred each quarter Other Cash Flow Assumptions Maintain a minimum cash balance of $10,000 at end of each quarter Use short-term loans to meet cash needs and to meet minimum cash balance; invest in short term marketable securities with excess cash so as not to exceed minimum cash balance Borrow no more cash than necessary, repay as promptly as possible Borrow/Repay loans or Invest/Sell securities in increments of $1,000 Borrowing/Repayments occur at the beginning of each quarter in question: Investing Selling securities occurs at the beginning of each quarter in question Accrue simple interest at the end of each quarter on outstanding loan balances; interest is paid in the following quarter: 16% annual rate (or 4% each quarter) Accrue simple interest at the end of each quarter on securities held; interest is received in the following quarter, 8% annual rate (or 2% each quarter) Accrue taxes at 30% on Earnings Before Taxes (EBT); Accrued taxes are remitted to governing bodies in the following quarter; for quarters with negative EBT, assume no taxes The company purchased a new, $3000 depreciable asset on Jan 1, Year 2 with cash. (See EBIT budget assumptions for depreciation expense requirements on this asset.) Prior Year (12/31/Year 1) Balance Sheet Assets Liabilities + Equity Cash $10,000 Accounts Payable $16,800 Marketable Securities $0 Interest Payable $0 Interest Receivable $0 Commissions Payable $6,000 Accounts Receivable $16,000 Short-term Notes Payable $0 Inventory $48,000 Income Taxes Payable $0 Prepaid Insurance $0 $75,400 Owner's Equity (Contributed + Earned Capital) Equipment, Gross $37,000 Accumulated Depreciation ($12,800) Balance Sheet Assumptions Assume that there is no additional equity contributed during Year 2; as such, the company will only increase the equity account via earned capital (1.e., retained earnings) Break-even Assumptions Calculate a sales mix based on units Assume wages, rent, other administrative expenses, and depreciation are fixed costs; assume cost of goods sold, commissions, and miscellaneous expenses are variable costs

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