Exam 4: Cash Flow and Financial Planning

In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. The excess cash balance (required financing) for August is

One way a firm can reduce the amount of cash it needs in any one month is to

The firm's free cash flow (FCF) represents the amount of cash flow available to pay bank loans after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

Because the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.

Gerry Jacobs, a financial analyst for Best Valu Supermarkets, has prepared the following sales and cash disbursement estimates for the period August through December of the current year. Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash budget for the months of October, November, and December, noting any needed financing or excess cash available.

The depreciable life of an asset can significantly affect the pattern of cash flows. The shorter the depreciable life of an asset, the more quickly the cash flow created by the depreciation write-off will be received.

The required total financing figures in the cash budget refer to the monthly changes in borrowing.

Table 4.5 A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2010. Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions. (a) The firm estimates sales of $1,000,000. (b) The firm maintains a cash balance of $25,000. (c) Accounts receivable represents 15 percent of sales. (d) Inventory represents 35 percent of sales. (e) A new piece of mining equipment costing $150,000 will be purchased in 2010. Total depreciation for 2010 will be $75,000. (f) Accounts payable represents 10 percent of sales. (g) There will be no change in notes payable, accruals, and common stock. (h) The firm plans to retire a long term note of $100,000. (i) Dividends of $45,000 will be paid in 2010. (j) The firm predicts a 4 percent net profit margin. Balance Sheet General Talc Mines December 31, 2009 -The pro forma total liabilities amount is ________. (See Table 4.5)

Given the financial manager's preference for faster receipt of cash flows,

The sales forecast, cash budget, and pro forma financial statements are the key outputs of the short-run (operating) financial planning.

Table 4.1 Ruff Sandpaper Co. Balance Sheets For the Years Ended 2009 and 2010 -All of the following are financing cash flows EXCEPT

Table 4.4 Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2010, for Hennesaw Lumber, Inc. Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2010. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2009 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions. -The pro forma accumulated retained earnings account on the balance sheet is projected to ________. (See Table 4.4)

The statement of cash flows includes all of the following categories EXCEPT

The finance definition of operating cash flow excludes interest as an operating flow.

Table 4.3 The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming months of January through May. Historically, 75 percent of sales are for cash with the remaining 25 percent collected in the following month. The ending cash balance in January is $3,000. Prepare a cash budget for the months of February through May to answer the following multiple choice questions. -The net cash flow for February is ________. (See Table 4.3)

In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.

It would be correct to define Operating Cash Flow (OCF) as net operating profit after taxes plus depreciation.

Table 4.5 A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2010. Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions. (a) The firm estimates sales of $1,000,000. (b) The firm maintains a cash balance of $25,000. (c) Accounts receivable represents 15 percent of sales. (d) Inventory represents 35 percent of sales. (e) A new piece of mining equipment costing $150,000 will be purchased in 2010. Total depreciation for 2010 will be $75,000. (f) Accounts payable represents 10 percent of sales. (g) There will be no change in notes payable, accruals, and common stock. (h) The firm plans to retire a long term note of $100,000. (i) Dividends of $45,000 will be paid in 2010. (j) The firm predicts a 4 percent net profit margin. Balance Sheet General Talc Mines December 31, 2009 -The pro forma net fixed assets amount is ________. (See Table 4.5)

Due to the no fixed costs assumption underlying the strict percent-of-sales method, the use of cost and expense ratios generally tends to understate profits when sales are increasing and overstate profits when sales are decreasing.

Cash flows associated with the purchase and sale of fixed assets and business interests are called