Principles of Managerial Finance

CHAPTER 3 Cash Flow and Financial Planning 129

LG5

Ms. McDonald notes that historically, 30% of sales have been for cash. Of

credit sales,70% are collected 1 month after the sale, and the remaining 30%

are collected 2 months after the sale. The firm wishes to maintain a minimum

ending balance in its cash account of $25. Balances above this amount would be

invested in short-term government securities (marketable securities), whereas

any deficits would be financed through short-term bank borrowing (notes

payable). The beginning cash balance at April 1 is $115.

a. Prepare a cash budget for April, May, and June.

b. How much financing, if any, at a maximum would Carroll Company require

to meet its obligations during this 3-month period?

c. A pro forma balance sheet dated at the end of June is to be prepared from the

information presented. Give the size of each of the following: cash, notes

payable, marketable securities, and accounts receivable.

ST 3–3 Pro forma income statement Euro Designs, Inc., expects sales during 2004 to

rise from the 2003 level of $3.5 million to $3.9 million. Because of a scheduled

large loan payment, the interest expense in 2004 is expected to drop to

$325,000. The firm plans to increase its cash dividend payments during 2004 to

$320,000. The company’s year-end 2003 income statement follows.

a. Use the percent-of-sales methodto prepare a 2004 pro forma income state-

ment for Euro Designs, Inc.

b. Explain why the statement may underestimate the company’s actual 2004

pro forma income.

Euro Designs, Inc.

Income Statement

for the Year Ended December 31, 2003

Sales revenue $3,500,000

Less: Cost of goods sold  (^1) , (^9)  (^2)  (^5) , (^0)  (^0)  (^0) 
Gross profits $1,575,000
Less: Operating expenses  (^4)  (^2)  (^0) , (^0)  (^0)  (^0) 
Operating profits $1,155,000
Less: Interest expense  (^4)  (^0)  (^0) , (^0)  (^0)  (^0) 
Net profits before taxes $ 755,000
Less: Taxes (rate40%)  (^3)  (^0)  (^2) , (^0)  (^0)  (^0) 
Net profits after taxes $ 453,000
Less: Cash dividends  (^2)  (^5)  (^0) , (^0)  (^0)  (^0) 
To retained earnings $

2

0

3

,

0

0

0

Cash
Month Sales disbursements
February $500 $400
March 600 300
April 400 600
May 200 500
June 200 200