table in last picture is for exercise 1

Prepare your responses to Exercises 1 and 2 on pages 314, and 315 You can use the attached Excel worksheet for both Exercises 1 and 2 including your responses on the worksheet below the table. Please label your responses with reference to the Exercise and part. . Please also include all of your calculations in the table cells. You may add information such as company projected sales and formulas for expense allocation below or to the side of the table for reference in cells of the table. Aug Sep Od Now 14 ZT 100 79 . 1882 188 as 75 70 000 97 114 35 32 4 FIGURE 113 DESIGNS BY DEZINE 20 CASH BUDGETS IN DOGS) Fee Apr Mayon 5 5 5 + 3 Begini Cash 05 2 Recept 18 25 35 60 30 Total Cash Awal 24 40 55 50 16 8 20 24 Materiale 24 4 28 purchases 5 Labor 7 11 14 25 28 non G&A) 6 S. Q & A 4 4 4 4 4 perises 7 Owner's salary 5 5 $ 5 5 $ 5 Interest expense 1 1 1 1 1 1 1 1 13 21 21 21 32 39 11 4 . 4 4 . 5 5 5 5 . 1 . 1 - + 51 55 55 59 56 74 85 25 29 36 65 9 2 NI 2 2 2 2 2 2 2 2 2 2 2 1 10 0 Total disbursements Loan principal paid Net capital expend Distributions of div 0 Ol o 0 0 0 o o 0 2 11 0 o 0 0 0 0 0 0 0 0 12 0 O 0 15 sa &1 61 31 38 57 57 46 53 28 78 57 19 82 Total cash paid out 1 7 4 2 8 8 9 12 (1) 27 14 Net cash position (4) 15 14 14 . 5 5 5 5 5 5 5 5 5 27 15 Minimum cash 15 0 6 3 3 1 (2) (3) (3) 4 0 16 S-T loan required 17 Cumulative loan reg 18 19 17 9 7 14 15 11 0 o ol Q 0 . Receipts-As summarized in monthly sales chart above, Designs by Dezine projects a sales increase for 20yx. The growth is from one full year of operations and projected larger contracts. The company is somewhat seasonal, with large sales levels in the summer and fall. As a construction company, Designs by Dezinc obtains a 50 percent down payment with each contract. Most contracts are completed in 30 to 45 days. The remaining 50 percent is collected on com- pletion. The company ended 20xz with $8,000 of accounts receivable. The first month's receipts would include $10,000 of down payments for the projected January sales. Therefore, the receipts are $18,000 ($8,000 accounts receivable collections and $10,000 down payments). Thus, Line 2 reflects the accounts receivable collections and sales down payments, totaling $18,000. Total cash availableTotal cash receipts on Line 3 equal the following i $24.000 for January ($6,000 cash, $8,000 accounts receivable collections and $10,000 down payment of projected January sales) o $27.000 for February ($10,000 collected on the balance of January sales, 50 percent down on projected February sales $12,000, plus beginning cash $5,000) . o $38.000 for March ($13,000 collected on the balance of February sales, 50 percent down on projected March sales $20,000, plus beginning cash of $5,000) Additional months thereafter, as shown in the chart above (receipts from down payments and the balance of sales from the previous month, plus beginning cash or excess net cash position) Total cash paid out-The cash-paid-out figures typically are estimated expendi- tures, using expenses as a percentage of sales, which is calculated from the compa- ny's previous income statement. The business banker might wish to discuss with the borrower what effect the new equipment and projected sales growth will have on the company's financial performance. Moreover, the business banker should analyze the expense categories to determine which of them are fixed and might remain stable in the face of growing sales. Cash budget expenditures might also be based on company provided estimates of proposed expenditures. Materials purchases and labor-Because the analysis shows growing sales for Designs by Dezine, it is logical for the business banker to assume that many of the company's costs will grow at a similar rate. The next step is to calculate materials purchases and labor expenses. Designs by Dezine's material expenses were 85.9 percent of sales last year. This amount also includes labor for each job. The company is projecting 75 percent of sales for materials and labor expenses. After a discussion with the owners, the business banker calculates the amount of materials costs at 40 percent and labor costs at 35 percent. When creating a cash budget, a business banker must take into account the actual timing of a company's accounts payable for raw materials or inventory payments. Designs by Dezine's accounts payable for materials are paid 30 days after the start of a job. Generally, raw materials are delivered early in the job, with payment duc 30 days after receipt of the raw materials. Therefore, January material purchases are $8,000 (December sales of $20,000 x 0.40 - $8,000). and labor expenses are $7.000 (projected sales of $20,000 x 0.35 - $7,000). February materials purchases are $8,000 (January projected sales of $20,000 * 0.40 - $8,000), and labor expenses are $11,000 (February projected sales of $30,000 x 0.35 - $10.500 rounded to $11,000). For each month following materials purchases will continue to be 40 percent of the previous month's sales and labor will be 35 percent of the current month's sales. Selling, general, and administrative (S, G, & A) expenditures-An income statement often lists the individual expense categories that make up is S, G, & Pero . A expenses, including office employees salaries, office supplies, advertising, the are incurred in the same month as the sales and are paid for in that same month portation, accounting, and so on. These expenditures support sales and generally It is not necessary to expect those expenditures to take place in advance of the date, S, G. &A expenses are calculated as a percentage of sales if no major changes are anticipated. For 20x, Designs by Dezine's S. G&A expenses were 57 sales are projected to increase substantially. The company is projecting S, G&A expenses of $46,000 for 20yx. After discussing this with the owner, the business banker determines that this amount is reasonable. Therefore, the cash budget $4.000 per month on Line 6. Owner's salary-Last year, Linda Dezine drew an officer's compensation of 842,700 for eight months. She is expecting to draw up to $80,000 this yet if the company's performance allows. However, she has agreed to limit her salary to $5,000 each month until the company can afford to pay her more The $5,000 draw is listed on Line 7 of the projected cash budget. Because the cash budget shows excess cash in November and December, she may choose to increase her salary during those months. Interest expense-The new loan for $8,000 and a shareholder loan taken out late last year will increase interest expense and the cash flow required for prin- cipal repayment compared with 20x2. Assuming that the interest rate will be 8 percent, the new interest expense would be about $546 for the first year of the computer loan, with payments starting in February (based on an amortization schedule). The amount of the shareholder loan is obtained from the tax return (546,172 at 12/31/20xz). If $1,000 principal reductions are made beginning in February, total interest expense for the 20yx will be about $3,743. The remaining debt is a loan for vehicles (trucks), shown as a $40,064 balance at 12/31/20xz. The loans started at $43,000 at 8 percent with payments of $872 over 60 months. Based on an amortization schedule, interest paid in 20yx should be about $2,880. For cash budget purposes, the interest on the existing loans (vehicles and share holder) is added together and divided by 12. This results in $552 of monthly interest for all 12 months. The interest on the computer loan is about $50 per month, beginning in February. Because the cash budget is presented in even thousands, the business banker will round the monthly amount up to $1,000 for the cash budget. Total disbursements-The sum of Lines 4 through 8 cquals total disburse- ments on Linc 9. This sum should total the cash expenditures for cost of goods sold: selling, general, and administrative expenses, and interest expense. Loan principal-As mentioned in the interest expense calculations, Designs by Dezine's balance sheet shows long-term debt of $40,064 for vehicles and a $46,172 shareholder loan at 12/31/20xz. Using an amortization sched- ule, the 20xx principal reduction for the vehicles loan will be about $7.582. company . 292 Analgin Financial Statement (The loan started at $43.000 at 8 percent for paymes of 5872 over 60 months. Six payments had been made during 20x2.) For cash budgeting this amount will be divided by 12, resulting in $632 per month. This will be rounded up to $1,000 for January Starting in February, the company is hoping to begin repaying shareholders $1.000 per month on the principal portion of the debt. Also in February payments rate and payments of $162 over 60 months, the principal reduction during 20yx (11 months) would be about $1,238, or $112 per month. So, principal will begin on the $8,000 computer loan. Using an 8 percent interest . reductions in February and the following months will include an additional $1.112. Together with the S632 per month for the vehicles loan, total monthly principal reduction is about $1.744, which will be rounded to $2.000. Net capital cxpenditures - Computer equipment is the company's only pro jected capital equipment purchase for 20yx. The amount on line 11 is shown nct of any long-term financing, which is expected to be $8,000. This leaves $2,000 as the net capital expenditure for cash budget purposes. The business banker will need to adjust this amount if the loan is not approved or is ob- tained for a different dollar amount. Income taxes and dividends-Income taxes sometimes can be a problem for businesses preparing cash budgets. Designs by Dezinc is an Scorporation, with Linda Dezine as the sole owner and personally liable for any taxable income. Therefore, the company will show no taxes paid. However, most Scorporations make a distribution to the owner to fund any income taxes on the business income that is passed through to the owner's personal tax return. Because the company showed an operating loss last year (20x), the amount of the dis- tribution for this year (20x) needs to be based on projected earnings. Linda Dezine is projecting a $45,000 profit for 20yx, so a distribution of $15,000 is . a projected for December Total cash paid out- The business banker has now accounted for all of the anticipated cash expenditures for each month for Designs by Dezine. The com- pany's projected total cash outlays are listed for each month on Line 13. Net cash position-This line of the cash budget is calculated by subtracting total cash paid our (Line 13) from total cash available (Line 3). It shows that Designs by Dezinc's net cash position does not exceed its minimum cash re- quired (Line 15) until May. Short-term loan required. This is the amount of cash the company needs to maintain its stated minimum cash position of $5,000. The amount of a loan required is calculated by subtracting the company's net cash position (Line 14) from its minimum cash requirement (Line 15). From January through April, the company needs additional short-term borrowings to maintain its cash position. In January the net cash position is (S4000), so $9.000 must be borrowed to end up with a positive minimum cash position of $5,000. In February the net Chand Pre Ferm Stammy293 cash position of $5,000. Starting in May, the net cash position exceeds the min- cash position is ($1,000), so $6,000 must be borrowed to reach the minimum imum cash level , so new borrowings are required. The negative numbers show the amount of cash (above the minimum level) that can be used to pay down short-term loans. . Cumulative loan required This is the running balance of the short-term borrowing needed to maintain the company's minimum cash position. In Jan- uary $9,000 must be borrowed to end up with a positive minimum cash po- another $6,000 must be borrowed to reach the minimum cash position of sition of $5,000, leaving a cumulative loan balance of $9,000. In February $5,000, leaving a cumulative loan balance of $15,000. Monthly borrowings occur through April , with the cumulative balance reaching a peak of $19,000 in that same month. In May, the net cash position is $7,000, so $2,000 of the loan can be repaid. In June the net cash position is $8,000, so $3,000 of the loan can be repaid. Through September, loan repayments of $19,000 will have been made, totally repaying any short-term borrowings. Cash balances begin to build from Octo- ber to December EXERCISE 1 Instructions In this exercise you will practice analyzing a cash budget for Designs by Dezine, Inc. Part 1 If raw material purchases need to be paid at the time of purchase, how would Designs by Dezine's cash budget be affected? Use the Cash Budget worksheet to recalculate the cash budget for 20xy. Part 2 Explain how was Designs by Dezine's cash budget was affected by the raw ma- terial purchases paid at the time of purchase. How does the short-term borrowing amount change? Year Sequence for Dates in Textbook Cases This chapter uses the following order or sequence of years for the dates in the financial statements: 20xx, 20xy, and 20xz For projected years, the following sequence is used: 20yx, 20yy, 20yz, and so on WORKSHEET DESIGNS DY DEZINE 20K CASH BUDGET Jan 1 Beginning Cash 5 2 Recept 18 Apre Mare 3 24 4 7 5 Total Cush Avail Materials purchases Labor (non-S, G. & A S.G & A ex pentes Owner's salary 4 6 5 7 8 Interest expense 25 9 Total disbursements 10 Loan principal 1 pad 2 11 Net capital expend Distributions or div 0 12 2 28 13 Total cash paid out 14 Net cash position (4) 5 9 15 Minimum cash 18 S-T loan required 17 Cumulative loan reg 9 EXERCISE 2 This exercise allows you to test your understanding of considerations for reviewing projections. Instructions Based on the information in the chapter on Cash Budgets and Pro Forma Statements, answer the following questions: 1. A company requests financing for its seasonal inventory. What type of forecast should be prepared? 2. What is the most important part of a long-term forecast? 3. What should be considered when forecasting accounts receivable and inventory? 4. What are the two possible balance sheet accounts to plug in a forecast? 5. Who should prepare pro forma financial statements? Prepare your responses to Exercises 1 and 2 on pages 314, and 315 You can use the attached Excel worksheet for both Exercises 1 and 2 including your responses on the worksheet below the table. Please label your responses with reference to the Exercise and part. . Please also include all of your calculations in the table cells. You may add information such as company projected sales and formulas for expense allocation below or to the side of the table for reference in cells of the table. Aug Sep Od Now 14 ZT 100 79 . 1882 188 as 75 70 000 97 114 35 32 4 FIGURE 113 DESIGNS BY DEZINE 20 CASH BUDGETS IN DOGS) Fee Apr Mayon 5 5 5 + 3 Begini Cash 05 2 Recept 18 25 35 60 30 Total Cash Awal 24 40 55 50 16 8 20 24 Materiale 24 4 28 purchases 5 Labor 7 11 14 25 28 non G&A) 6 S. Q & A 4 4 4 4 4 perises 7 Owner's salary 5 5 $ 5 5 $ 5 Interest expense 1 1 1 1 1 1 1 1 13 21 21 21 32 39 11 4 . 4 4 . 5 5 5 5 . 1 . 1 - + 51 55 55 59 56 74 85 25 29 36 65 9 2 NI 2 2 2 2 2 2 2 2 2 2 2 1 10 0 Total disbursements Loan principal paid Net capital expend Distributions of div 0 Ol o 0 0 0 o o 0 2 11 0 o 0 0 0 0 0 0 0 0 12 0 O 0 15 sa &1 61 31 38 57 57 46 53 28 78 57 19 82 Total cash paid out 1 7 4 2 8 8 9 12 (1) 27 14 Net cash position (4) 15 14 14 . 5 5 5 5 5 5 5 5 5 27 15 Minimum cash 15 0 6 3 3 1 (2) (3) (3) 4 0 16 S-T loan required 17 Cumulative loan reg 18 19 17 9 7 14 15 11 0 o ol Q 0 . Receipts-As summarized in monthly sales chart above, Designs by Dezine projects a sales increase for 20yx. The growth is from one full year of operations and projected larger contracts. The company is somewhat seasonal, with large sales levels in the summer and fall. As a construction company, Designs by Dezinc obtains a 50 percent down payment with each contract. Most contracts are completed in 30 to 45 days. The remaining 50 percent is collected on com- pletion. The company ended 20xz with $8,000 of accounts receivable. The first month's receipts would include $10,000 of down payments for the projected January sales. Therefore, the receipts are $18,000 ($8,000 accounts receivable collections and $10,000 down payments). Thus, Line 2 reflects the accounts receivable collections and sales down payments, totaling $18,000. Total cash availableTotal cash receipts on Line 3 equal the following i $24.000 for January ($6,000 cash, $8,000 accounts receivable collections and $10,000 down payment of projected January sales) o $27.000 for February ($10,000 collected on the balance of January sales, 50 percent down on projected February sales $12,000, plus beginning cash $5,000) . o $38.000 for March ($13,000 collected on the balance of February sales, 50 percent down on projected March sales $20,000, plus beginning cash of $5,000) Additional months thereafter, as shown in the chart above (receipts from down payments and the balance of sales from the previous month, plus beginning cash or excess net cash position) Total cash paid out-The cash-paid-out figures typically are estimated expendi- tures, using expenses as a percentage of sales, which is calculated from the compa- ny's previous income statement. The business banker might wish to discuss with the borrower what effect the new equipment and projected sales growth will have on the company's financial performance. Moreover, the business banker should analyze the expense categories to determine which of them are fixed and might remain stable in the face of growing sales. Cash budget expenditures might also be based on company provided estimates of proposed expenditures. Materials purchases and labor-Because the analysis shows growing sales for Designs by Dezine, it is logical for the business banker to assume that many of the company's costs will grow at a similar rate. The next step is to calculate materials purchases and labor expenses. Designs by Dezine's material expenses were 85.9 percent of sales last year. This amount also includes labor for each job. The company is projecting 75 percent of sales for materials and labor expenses. After a discussion with the owners, the business banker calculates the amount of materials costs at 40 percent and labor costs at 35 percent. When creating a cash budget, a business banker must take into account the actual timing of a company's accounts payable for raw materials or inventory payments. Designs by Dezine's accounts payable for materials are paid 30 days after the start of a job. Generally, raw materials are delivered early in the job, with payment duc 30 days after receipt of the raw materials. Therefore, January material purchases are $8,000 (December sales of $20,000 x 0.40 - $8,000). and labor expenses are $7.000 (projected sales of $20,000 x 0.35 - $7,000). February materials purchases are $8,000 (January projected sales of $20,000 * 0.40 - $8,000), and labor expenses are $11,000 (February projected sales of $30,000 x 0.35 - $10.500 rounded to $11,000). For each month following materials purchases will continue to be 40 percent of the previous month's sales and labor will be 35 percent of the current month's sales. Selling, general, and administrative (S, G, & A) expenditures-An income statement often lists the individual expense categories that make up is S, G, & Pero . A expenses, including office employees salaries, office supplies, advertising, the are incurred in the same month as the sales and are paid for in that same month portation, accounting, and so on. These expenditures support sales and generally It is not necessary to expect those expenditures to take place in advance of the date, S, G. &A expenses are calculated as a percentage of sales if no major changes are anticipated. For 20x, Designs by Dezine's S. G&A expenses were 57 sales are projected to increase substantially. The company is projecting S, G&A expenses of $46,000 for 20yx. After discussing this with the owner, the business banker determines that this amount is reasonable. Therefore, the cash budget $4.000 per month on Line 6. Owner's salary-Last year, Linda Dezine drew an officer's compensation of 842,700 for eight months. She is expecting to draw up to $80,000 this yet if the company's performance allows. However, she has agreed to limit her salary to $5,000 each month until the company can afford to pay her more The $5,000 draw is listed on Line 7 of the projected cash budget. Because the cash budget shows excess cash in November and December, she may choose to increase her salary during those months. Interest expense-The new loan for $8,000 and a shareholder loan taken out late last year will increase interest expense and the cash flow required for prin- cipal repayment compared with 20x2. Assuming that the interest rate will be 8 percent, the new interest expense would be about $546 for the first year of the computer loan, with payments starting in February (based on an amortization schedule). The amount of the shareholder loan is obtained from the tax return (546,172 at 12/31/20xz). If $1,000 principal reductions are made beginning in February, total interest expense for the 20yx will be about $3,743. The remaining debt is a loan for vehicles (trucks), shown as a $40,064 balance at 12/31/20xz. The loans started at $43,000 at 8 percent with payments of $872 over 60 months. Based on an amortization schedule, interest paid in 20yx should be about $2,880. For cash budget purposes, the interest on the existing loans (vehicles and share holder) is added together and divided by 12. This results in $552 of monthly interest for all 12 months. The interest on the computer loan is about $50 per month, beginning in February. Because the cash budget is presented in even thousands, the business banker will round the monthly amount up to $1,000 for the cash budget. Total disbursements-The sum of Lines 4 through 8 cquals total disburse- ments on Linc 9. This sum should total the cash expenditures for cost of goods sold: selling, general, and administrative expenses, and interest expense. Loan principal-As mentioned in the interest expense calculations, Designs by Dezine's balance sheet shows long-term debt of $40,064 for vehicles and a $46,172 shareholder loan at 12/31/20xz. Using an amortization sched- ule, the 20xx principal reduction for the vehicles loan will be about $7.582. company . 292 Analgin Financial Statement (The loan started at $43.000 at 8 percent for paymes of 5872 over 60 months. Six payments had been made during 20x2.) For cash budgeting this amount will be divided by 12, resulting in $632 per month. This will be rounded up to $1,000 for January Starting in February, the company is hoping to begin repaying shareholders $1.000 per month on the principal portion of the debt. Also in February payments rate and payments of $162 over 60 months, the principal reduction during 20yx (11 months) would be about $1,238, or $112 per month. So, principal will begin on the $8,000 computer loan. Using an 8 percent interest . reductions in February and the following months will include an additional $1.112. Together with the S632 per month for the vehicles loan, total monthly principal reduction is about $1.744, which will be rounded to $2.000. Net capital cxpenditures - Computer equipment is the company's only pro jected capital equipment purchase for 20yx. The amount on line 11 is shown nct of any long-term financing, which is expected to be $8,000. This leaves $2,000 as the net capital expenditure for cash budget purposes. The business banker will need to adjust this amount if the loan is not approved or is ob- tained for a different dollar amount. Income taxes and dividends-Income taxes sometimes can be a problem for businesses preparing cash budgets. Designs by Dezinc is an Scorporation, with Linda Dezine as the sole owner and personally liable for any taxable income. Therefore, the company will show no taxes paid. However, most Scorporations make a distribution to the owner to fund any income taxes on the business income that is passed through to the owner's personal tax return. Because the company showed an operating loss last year (20x), the amount of the dis- tribution for this year (20x) needs to be based on projected earnings. Linda Dezine is projecting a $45,000 profit for 20yx, so a distribution of $15,000 is . a projected for December Total cash paid out- The business banker has now accounted for all of the anticipated cash expenditures for each month for Designs by Dezine. The com- pany's projected total cash outlays are listed for each month on Line 13. Net cash position-This line of the cash budget is calculated by subtracting total cash paid our (Line 13) from total cash available (Line 3). It shows that Designs by Dezinc's net cash position does not exceed its minimum cash re- quired (Line 15) until May. Short-term loan required. This is the amount of cash the company needs to maintain its stated minimum cash position of $5,000. The amount of a loan required is calculated by subtracting the company's net cash position (Line 14) from its minimum cash requirement (Line 15). From January through April, the company needs additional short-term borrowings to maintain its cash position. In January the net cash position is (S4000), so $9.000 must be borrowed to end up with a positive minimum cash position of $5,000. In February the net Chand Pre Ferm Stammy293 cash position of $5,000. Starting in May, the net cash position exceeds the min- cash position is ($1,000), so $6,000 must be borrowed to reach the minimum imum cash level , so new borrowings are required. The negative numbers show the amount of cash (above the minimum level) that can be used to pay down short-term loans. . Cumulative loan required This is the running balance of the short-term borrowing needed to maintain the company's minimum cash position. In Jan- uary $9,000 must be borrowed to end up with a positive minimum cash po- another $6,000 must be borrowed to reach the minimum cash position of sition of $5,000, leaving a cumulative loan balance of $9,000. In February $5,000, leaving a cumulative loan balance of $15,000. Monthly borrowings occur through April , with the cumulative balance reaching a peak of $19,000 in that same month. In May, the net cash position is $7,000, so $2,000 of the loan can be repaid. In June the net cash position is $8,000, so $3,000 of the loan can be repaid. Through September, loan repayments of $19,000 will have been made, totally repaying any short-term borrowings. Cash balances begin to build from Octo- ber to December EXERCISE 1 Instructions In this exercise you will practice analyzing a cash budget for Designs by Dezine, Inc. Part 1 If raw material purchases need to be paid at the time of purchase, how would Designs by Dezine's cash budget be affected? Use the Cash Budget worksheet to recalculate the cash budget for 20xy. Part 2 Explain how was Designs by Dezine's cash budget was affected by the raw ma- terial purchases paid at the time of purchase. How does the short-term borrowing amount change? Year Sequence for Dates in Textbook Cases This chapter uses the following order or sequence of years for the dates in the financial statements: 20xx, 20xy, and 20xz For projected years, the following sequence is used: 20yx, 20yy, 20yz, and so on WORKSHEET DESIGNS DY DEZINE 20K CASH BUDGET Jan 1 Beginning Cash 5 2 Recept 18 Apre Mare 3 24 4 7 5 Total Cush Avail Materials purchases Labor (non-S, G. & A S.G & A ex pentes Owner's salary 4 6 5 7 8 Interest expense 25 9 Total disbursements 10 Loan principal 1 pad 2 11 Net capital expend Distributions or div 0 12 2 28 13 Total cash paid out 14 Net cash position (4) 5 9 15 Minimum cash 18 S-T loan required 17 Cumulative loan reg 9 EXERCISE 2 This exercise allows you to test your understanding of considerations for reviewing projections. Instructions Based on the information in the chapter on Cash Budgets and Pro Forma Statements, answer the following questions: 1. A company requests financing for its seasonal inventory. What type of forecast should be prepared? 2. What is the most important part of a long-term forecast? 3. What should be considered when forecasting accounts receivable and inventory? 4. What are the two possible balance sheet accounts to plug in a forecast? 5. Who should prepare pro forma financial statements