Short-Term Cash Management (20)

Alpha Corporation is a toy products traditional retailer that recently also started an Internet-based subsidiary that sells toys online. A markup is added on goods the company purchases from manufacturers for resale. Swen Artero, the company president, is preparing for a meeting with Jennifer Brown, a loan officer with First Banco Corporation, to review year end financing requirements. After discussions with the companys marketing manager Rolf Eriksson and finance manager Lisa Erdinger, sales over the next three months were forecasted as follows.

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Month Sales Forecast

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October 2015 $1,000

November 2,000

December 3,000 ____________________________________________________________________

Alphas balance sheet as of the end of September, 2015 was as follows.

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Alpha Corporation

Balance Sheet as of September 30, 2015 (in $ Thousands)

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Cash $ 50 Accounts payable $ 0

Accounts receivable 700 Notes payable 800

Inventories 500 Long-term debt 400

Net fixed assets 750 Total liabilities 1,200

Equity 800

Total assets $2,000 Total $2,000

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All sales are made on credit terms of net 30 days and are collected the following month and no bad debts are anticipated. The accounts receivable on the balance sheet at the end of September thus will be collected in October. The October sales will be collected in November, and so on. Inventory on hand represents a minimum operating level (or safety stock), which the company intends to maintain. Cost of goods sold average 70 percent of sales. Inventory is purchased in the month of sale and paid for in cash. Other cash expenses average 10 percent of sales. Depreciation is $10,000 per month. Assume taxes are paid monthly and the effective income tax rate is 40 percent for planning purposes.

The annual interest rate on outstanding long-term debt and bank loans (notes payable) is 12%. There are no capital expenditures planned during the period, and no dividends will be paid. The companys desired end-of-month cash balance is $80,000. The president hopes to meet any cash shortages during the period by increasing the firms notes payable to the bank. The interest rate on new loans will be 12%.

Prepare a monthly cash budget for the October, November, and December 2015.

Prepare monthly pro forma income statements for October, November, and December 2015.

Prepare monthly pro forma balance sheets at the end of October, November, and December,