cfm10eaiseIM04rev.docx
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cfm10eaiseIM04rev
CHAPTER4
FINANCIALPLANNINGANDFORECASTING
ANSWERSTOQUESTIONS:
1.Deferredtaxesarisebecauseofthetimingdifferenceofsomeexpensesasrecordedforfinancialreportingpurposesandthesesameexpensesasrecordedforthepurposeofmakingtaxfilings.Forexample,mostfirmsuseaccelerateddepreciationfortaxpurposesandstraight-linedepreciationforfinancialreporting.Consequently,taxableincomeishigheronthecompany’spublicfinancialstatementsand“taxespaid”alsoishigher.Actualtaxespaidaredeterminedfromacompany’staxfilings.Thedifferencebetweentaxes“actually”paid,andtaxesshownasbeingpaidonafirm’spublicfinancialstatementsisrecordedasdeferredtaxesontheright-handsideofthebalancesheet.
2.Proformafinancialstatementsarefinancialstatementsthatprojecttheresultsofsomeassumedeventsratherthanactualevents.Theassumedeventsdonotnecessarilyhavetobefutureevents;forexample,acompanyconsideringacquiringanothercompanywillusuallyprepareproformastatementsassumingthetwocompanieshadbeenmergedforthepastcoupleofyears.
3.Thepercentageofsalesforecastingmethodisamethodofestimatingtheadditionalfinancingthatwillbeneededtosupportagivenfuturesaleslevel.Financialanalystsshouldbeawarethatthemethodassumesthatasacompany'ssalesincrease,itsassetsarealsoassumedtoincreaseproportionatelytosupportthenewsales.Inaddition,thecurrentliabilitiesthatvarydirectlywithsalesarealsoassumedtoincreaseproportionatelywiththenewsales.Theseassumptionsmaynotholdinmanyactualfinancialplanningsituations.
4.Acashbudgetisaprojectionofacompany'scashreceiptsanddisbursementsoversomefutureperiodoftime.Normallyaworksheetisprepared,showingexpectedreceiptsanddisbursementsoverthetimeperiod.Then,thereceiptsanddisbursementsfigures(normally,monthly)arecombinedtodeterminewhenthecompanywillrequireshort-termfinancingandwhenitwillhaveexcesscash.
5.Thestatementofcashflowscanbeusedtoestimatehowmuchexternalfinancingacompanywillneedinsomefutureperiodbyestimatingtheothercashflowsofthecompanyfortheperiod(seeProblem16).
6.Adeterministicmodelprovidesasingle-numberforecastofafinancialvariable(orvariables)withoutspecifyingtheprobabilityofoccurrenceofthesevariables.Aprobabilisticmodelgeneratesasoutputaprobabilitydistributionofpossiblevaluesofthefinancialvariable(s).
SOLUTIONSTOPROBLEMS:
1.ATCF=EAT+Depreciation+Deferredtaxes
=$650,000+$400,000+$100,000
=$1,150,000
2.SummitFurnitureCompanyStatementofCashFlows
FortheYearEndedDecember31,2005
Increase(Decrease)inCashandCashEquivalents(000)
CashFlowsfromOperatingActivities:
Cashreceivedfromcustomers$142,000
Cashpaidtosuppliersandemployees(120,000)
Interestreceived600
Interestpaid(netofamountcapitalized)(2,000)
Incometaxespaid(6,000)
Netcashprovided(used)byoperatingactivities$14,600
CashFlowsfromInvestingActivities:
Proceedsfromsaleofasset$1,000
Capitalexpenditures(22,000)
Netcashprovided(used)byinvestingactivities($21,000)
CashFlowsfromFinancingActivities
Netborrowingsunderbankline-of-creditagreement$1,000
Repaymentsoflong-termdebt(2,600)
Proceedsfromissuanceoflong-termdebt4,000
Dividendspaid(800)
Netcashprovided(used)byfinancingactivities$1,600
Netincrease(decrease)incashandcashequivalents($4,800)
Cashandcashequivalentsatbeginningofyear5,000
Cashandcashequivalentsatendofyear$200
3.MidlandManufacturingCorporation
StatementofCashFlowsFortheYearEndedDecember31,2002
($millions)
CashFlowsfromOperatingActivities:
Netincome$8.3
Adjustmentstoreconcilenetincometonetcashprovided
fromoperatingactivities
Depreciation9.5
(Increase)decreaseincurrentassetsorliabilities
Accountsreceivable(0.3)
Inventories(0.7)
Accountspayable1.5
Othercurrentliabilities2.2
Increase(decrease)indeferredtaxes0.2
Totaladjustments12.4
Netcashprovidedfrom(usedby)operatingactivities20.7
CashFlowsfromInvestingActivities
Proceedsfromsaleoffacilitiesorequipment1.0
Capitalexpenditures($115.0-$80.7+$1.0)(35.3)
Netcashusedbyinvestingactivities(34.3)
CashFlowsfromFinancingActivities
Proceedsfromissuanceoflong-termdebt15.0
Repaymentsoflong-termdebt(2.0)
Dividendspaid(3.5)
Netcashprovidedfrom(usedby)financingactivities9.5
NetIncrease(Decrease)inCash(4.1)
Cash-BeginningofYear4.9
Cash-EndofYear$0.8
4.(Actual)(ProForma)
BalanceSheetDecember31,2006December31,2007
Assets
Cash$500,000$650,000
AccountsReceivable2,000,0002,600,000
Inventory4,000,0005,200,000
TotalCurrentAssets$6,500,000$8,450,000
Fixedassets,net$1,000,000$1,300,000
TotalAssets$7,500,000$9,750,000
LiabilitiesandEquity
AccountsPayable(CL)$1,500,000$1,950,000
NotesPayable1,000,0001,000,000
TotalCurrentLiabilities$2,500,000$2,950,000
Long-termDebt500,0002,050,000
Stockholders’Equity4,500,0004,750,000
TotalLiabilities&
Stockholders’Equity$7,500,000$9,750,000
IncomeStatement20062007________
Sales$15,000,000$19,500,000
Expenses(includingInterest
andTaxes)14,250,00018,750,000
Earningsaftertaxes(EAT)$750,000$750,000
Dividendspaid(D)250,000500,000
RetainedEarnings$500,000$250,000
SelectedFinancialRatios______________________________________
CurrentRatio2.60times2.86times
DebtRatio40%51.3%
16.7%15.8%
NPM5.0%3.8%
AdditionalFinancingNeeded=AdditionstoAssets–AdditionstoCurrentLiabilities–
RetainedEarnings
=$2,250,000-$450,000-$250,000=$1,550,000
=IncreaseinLong-termDebt
Problem#5followsonthenext2pages
CashBudget
FirstQuarter,2006
DecemberJanuaryFebruaryMarch
Sales$825,000$730,000$840,000$920,000
Projectedcashbalance
beginningofmonth$100,000$100,000$100,000
Receipts:
Cashsales40,00060,00065,000Collectionofaccountsreceivable750,000712,500798,750
Totalcashavailable$890,000872,500963,750
Disbursements:
Paymentofaccountspayable$438,000$504,000$552,000
Wagesandsalaries250,000290,000290,000
Rent27,00027,00027,000
Otherexpenses10,00012,00014,000
Taxes105,000------Dividendsoncommonstock------40,000Purchaseofnewequipment(capitalbudget)---75,000---
Totaldisbursements$830,000$908,000$923,000
Excessofavailablecashover$60,000($35,500)$40,750
disbursements
Cashloansneededtomaintain
balanceof$100,00040,000135,50059,250
Projectedcashbalance,endofmonth$100,000$100,000$100,000
*Purchasesareestimatedat60%ofnextmonth’ssales.
**Paymentsareestimatedtolagpurchasesbyonemonth
6.ElmwoodManufacturingCompany
CashBudgetWorksheet
FirstQuarter,2007
DecemberJanuaryFebruaryMarchApril
EstimatedSales$4,600,000$6,400,000$11,200,000$8,400,000$7,000,000
(alloncredit)
EstimatedReceipts
60%oflastmonth’ssales--2,760,0003,840,0006,720,000--
40%ofcurrentmonth’ssales--2,560,0004,480,0003,360,000--
TotalA/RCollections5,320,0008,320,00010,080,000
EstimatedPurchases*1,920,0003,360,0002,520,000----
EstimatedPayments**--1,920,0003,360,0002,520,000
*30%ofnextmonth’sestimatedsales
**Paymentslagpurchasesbyonemonth
CashBudget
FirstQuarter,2007
DecemberJanuaryFebruaryMarchApril
Sales$4,600,000$6,400,000$11,200,000$8,400,000$7,000,000
Projectedcash
balance,beginning
ofmonth$1,500,000$750,000$750,000
Receipts:
CollectionofA/R5,320,0008,320,00010,080,000
Totalcashavailable$6,820,000$9,070,000$10,830,000
Disbursements
PaymentsofA/P$1,920,000$3,360,000$2,520,000
Laborexpenses3,920,0002,940,0002,450,000
Factoryoverhead650,000670,000670,000
Sellingandadm.Expenses1,275,0001,285,0001,310,000
Taxes--1,600,000
Dividends--650,000
Purchaseofnewequipment-1,500,000-
Totaldisbursements$7,765,000$9,755,000$9,200,000
Excessofavailablecash
overdisbursements($945,000)($685,000)$1,630,000
Incrementalcashloansneeded
tomaintainabalanceof
$750,000$1,695,000$1,435,000-
Loanrepayment00$880,000
Projectedcashbalance,
endofmonth$750,000$750,000$750,000
7.PodraskyCorporation
ProFormaStatementofCashFlows
($millions)
CashFlowsfromOperatingActivities:
Netincome$80
Adjustmentstoreconcilenetincometonetcashprovided
fromoperatingactivities
Depreciation80
(Increase)decreaseincurrentassetsorliabilities
Accountsreceivable(20)
Inventories(20)
Totaladjustments40
Netcashprovidedfrom(usedby)operatingactivities120
CashFlowsfromInvestingActivities
Capitalexpenditures(200)
Netcashusedbyinvestingactivities(200)
CashFlowsfromFinancingActivities
AdditionalfinancingX
Repaymentsoflong-termdebt(10)
Dividendspaid(15)
Requiredincreaseincashbalance(3)
Netcashprovidedfrom(usedby)financingactivities(28)+X
Inthisproblem,theexpectedcashflowsmustequalzero.Therefore,
$120-$200-28+X=0
X=$108
Therefore,theadditionalfinancingrequiredis$108million.
8.a.A=$2,300,000S=$4,000,000S=$2,000,000
D=$50,000EAT=$400,000CL=$600,000
Additional
Financing=[(A/S)(S)-(CL/S)(S)]-[EAT-D]
Needed
=[(2,300,000/4,000,000)(2,000,000)
-(600,000/4,000,000)(2,000,000)]
-[400,000-50,0
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