a. What is causing Hal’s cash flow problems? b. Develop detailed plan that you can present to him in order to help him address the problems.

Application Assignment #5 – Lesson 6
Please take note that there are multiple questions/topics covered in this assignment. You need to show all your work, where applicable, don’t just provide an answer.

1. Stan was at his banker’s trying to get a short-term loan. “I need about $10,000 for three months, just until I get things straightened out. This is my situation: I got this nice order last February from Baker Company. Their bill was due last month, but so far I haven’t seen anything. Now I have another big order, this time from Gisher Construction and I need to order raw materials, but I cannot since Baker has not paid. Even when they do pay, it is only about 75% of what I will need to order to do the Gisher contract. Then, we are headed into our slow months; no one much does anything through the winter. And with the hurricane down in Florida, people are thinking twice before placing their orders.”

Stan was experiencing a number of cash flow problems that small businesses (and often larger businesses) face.
a. Identify five problems Stan is experiencing with Cash Flow?

2. Hal Carrier, of Bulltuff Stock Trailers, Inc., has asked for your help. In the last four months, he has had several checks written to suppliers that were refused by his bank because of nonsufficient funds. Now his main supplier, Alcoa Aluminum Supply Co., has cut off credit.
“We are sorry Hal,” Alcoa credit officer said, “but we simply cannot keep accepting your checks. Every time one bounces, it costs us at least $100 combined in processing fees and our internal accounting. You simply will have to pay cash or bring a cashier’s check for future purchases.”
Hal simply cannot understand why his checks keep bouncing. “We’ve plenty of sales,” he said, “and our customers pay pretty much as agreed. Right now I have only one customer who is as much as 60 days past due. My accountant, Bill Yant, assures me that our cash balance never goes negative. So why are my checks bouncing?
• Cash sales are 10% of total assets.
• Credit card sales are 10% of total sales and are collected the week following the sale. The credit card provider deducts 2.5% of the gross amount of each credit card sale. (For example, on a sale of $100, $2.50 is deducted.)
• Sales on credit are 80% of all sales. All credit sales are to dealers. Terms for dealers are “30-30-30,” that is, three equal payments made in each of the three months following the sale. Payments are considered late if they are not received by the 10th of the month in which they are due.
• Direct Materials, primarily aluminum, are 60% of the cost of building a trailer. Before credit was cut off, Bulltuff paid 30% on delivery and the remainder in 30 days. Now it must pay cash on delivery.
• Total cost of direct labor is 15% of the costs of building a trailer. Workers are paid each Friday for work performed the previous week. Withholding and employment taxes are paid each Friday, also.
• Variable costs combined (e.g.: materials and labor) are 50% of gross sales. Fixed costs are not allocated to the costs of trailers but are expensed evenly across the year.
• All other costs combined are treated as fixed costs, and total $1 million per year.
• Bulltuff leases its building and equipment and has no depreciation.
• Sales for the year were originally projected to be $2,450,000. However, given the current growth in sales. Hal now estimates that sales will be $5,000,000
• Sales for the first four months of the year have been:
 January $208,000
 February $261,000
 March $293,000
 April $328,000

a. What is causing Hal’s cash flow problems?
b. Develop detailed plan that you can present to him in order to help him address the problems.

3. Sequoia Furniture Company’s sales over the past three months, half of which are for cash, were as follows:
March – $400,000
April – $650,000
May – $520,000
a. Assume that Sequoia’s collection period is 60 days. What would its cash receipts in May? What would be its accounts receivables balance at the end of May?
b. Now assume that Sequoia’s collection period is 45 days. What would be its cash receipts in May? What would be its accounts receivables balance at the end of May?

4. You own a wholesale distributor of household appliances, and you want to estimate your company’s cash balances for the first three months of 2015. Using the financial information provided on the next page, construct a monthly cash budget for your business for January through March 2015. Your sales are 20% for cash, while the rest on 30-day credit terms. Your purchases are all on 60-day credit terms.
a. Construct a cash budget for the first three months of 2018.
b. Does it appear from your results that you should be concerned about your cash balances? Do you have enough cash or do you have to seek a bank loan to make ends meet in January, February or March 2018?

Your Business, Inc. ($ thousands)
2017 (Actual) 2018 (Projected)
October November December January February March
Sales 360 420 1,200 600 240 240
Purchases 510 540 1,200 300 120 120

Wages payable monthly 180
Principal Payment on debt due in March 210
Interest Due in March 90
Dividend payable in March 300
Taxes Payable in February 180
Added to Depreciation in March 30
Cash Balance on January 2018 300
Minimum desired cash balance 150

5. Poll Auto Parts, a family-owned auto parts store, began January with $10,200 cash. Management forecasts that collections from credit customers will be $11,700 in January and $15,000 in February. The store is scheduled to receive $7,000 cash on a business note receivable in January. Projected cash payments include inventory purchases ($14,500 in January and $13,900 in February) and operating expenses ($2,900 each month).

Poll Auto Parts’ bank requires a $10,000 minimum balance in the store’s checking account. At the end of any month when the account balance dips below $10,000 the bank automatically extends credit to the store in multiples of $1,000. Poll Auto Parts borrows as little as possible and pays back loans in quarterly installments of $2,500, plus 5% interest on the entire unpaid principal. The first payment occurs three months after the loan.
a. Prepare Poll Auto Parts’ cash budget for January and February.
b. How much cash will Poll Auto Parts borrow in February if collections from customers that month total $14,000 instead of $15,000

6. Using the information provided on the next page:
a. Construct a monthly cash budget for October through December 2014.
b. Based on your analysis, will Noble enjoy cash flow surplus, or require external financing in October, November, December? How much will he have in surplus or will he need by the end of the year?
Noble Selected Information and Financial Statements
Sales (20% for cash, the rest on 30-day credit terms):
2014 Actual 2014 Projected
July August September October November December
76,000 88,000 266,000 125,000 51,000 53,000

Purchases (all on 60-day terms):
2014 Actual 2014 Projected
July August September October November December
116,000 122,000 257,000 62,000 27,000 26,000

Salaries payable monthly 20,000
Principal payment on debt due in December 25,700
Interest due in December 9,000
Dividend payable in December 15,000
Taxes payable in November 19,000
Addition to accumulated depreciation in December 4,000

Cash balance on October 1, 2014 34,000
Minimum desired cash balance 15,000

Noble’s annual income statement and balance sheet for September 30, 2014 appear below.
Additional information about the company’s accounting methods and expectations for
the last three months of 2014 appear in the footnotes.

Annual Income Statement
Fiscal Year ended September 30, 2014
($ 000)

Net sales 1,581.6
Cost of goods sold1 1,098.0
Gross profits 483.6
Selling and administrative expenses2 240.0
Interest expense 18.0
Depreciation3 16.0
Net profit before tax 209.6
Tax at 33% 69.2
Net profit after tax 140.4

Balance Sheet
September 30, 2014 ($ 000)

Cash 34.0
Accounts receivable 212.8
Inventory 425.0
Total current assets 671.8
Gross fixed assets 135.0
Accumulated depreciation 52.0
Net fixed assets 83.0
Total assets 754.8

Bank loan 0.0
Accounts payable 379.0
Accrued expenses4 55.0
Current portion long-term debt5 25.7
Taxes payable 56.0
Total current liabilities 515.7
Long-term debt 120.0
Shareholders’ equity 119.1
Total liabilities and equity 754.8

1. Cost of goods sold consists entirely of items purchased during the quarter.
2. Selling and administrative expenses consist entirely of salaries.
3. Depreciation is straight-line at the rate of $4,000 per quarter.
4. Accrued expenses are not expected to change in the last quarter.
5. $25.7 due December 2014. No payments for remainder of year.


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