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FIN 350 Week 3 Module 3 Practice Problems

P4–5 Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither (N).

P4–6 Finding operating and free cash flows Consider the following balance sheets and selected data from the income statement of Keith Corporation.

1. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended December 31, 2015, using Equation 4.1.
2. Calculate-the firm’s operating cash flow (OCF) for the year ended December 31, 2015, using Equation 4.3.
3. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2015, using Equation 4.4.
4. Interpret, compare, and contrast your cash flow estimates in parts b and c.

P4–9 Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.

• The firm makes 20% of sales for cash, 60% are …..in the next month, and the remaining 20% are collected in the second month following sale.
• The-firm receives other income of $2,000 per month.
• The firm’s actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for the months of May through July, respectively.
• Rent is $3,000 per month.
• Wages and salaries are 10% of the previous month’s sales.
• Cash dividends of $3,000 will be paid in June.
• Payment of principal and interest of $4,000 is due in June.
• A cash purchase of equipment costing $6,000 is …..in July.
• Taxes of $6,000 are due in June.

P4–15: Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2016 will be $1.5 million. Interest expense is ….to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2016. Metroline Manufacturing’s income statement for the year ….December 31, 2015, and a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components are ……below.

• Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2016.
• Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2016.
• Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2016 income? Explain why.

P4–18: Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It wishes to analyze expected performance and financing needs for 2017, which is 2 years ahead. Given the following information, respond to parts a and b.

• The percents of sales for items that vary directly with sales are as follows: Accounts receivable, 12% Inventory, 18% Accounts payable, 14% Net profit margin, 3%
• Marketable securities and other current liabilities are …..to remain unchange
• A minimum cash balance of $480,000 is desire
• A new machine costing $650,000 will be ……in 2016, and equipment costing $850,000 will be purchased in 2017. Total depreciation in 2016 is forecast as $290,000, and in 2017 $390,000 of depreciation will be ……
• Accruals are expect to rise to $500,000 by the end of 2017.
• No sale or retirement of long-term debt is ……
• No sale or repurchase of common stock is expected.
• The dividend payout of 50% of net profits is …..to continue.
• Sales are …..to be $11 million in 2016 and $12 million in 2017.
• The December 31, 2015, balance sheet follows.

Prepare a pro forma balance sheet dated December 31, 2017.

Discuss the financing changes suggested by the statement prepared in part a.

FIN 350 Week 3 Module 3 Discussion Question 1

Is it possible for a firm to have a positive profit and yet have a negative cash flow? Describe a scenario under which this might occur? Where does the money from profits go in such a case?

FIN 350 Module 3 Discussion Question 2

If you were to examine the cash budgets of almost any organization, you would find distinct seasonal patterns of cash inflows and outflows. These patterns cause months during the year when almost every business is flush with cash, and other months in which things are extremely tight. Select an organization in which you are (were) ….., and describe the seasons of the year when this firm was flush with cash and the seasons when this firm was typically on a tight budget. Why did these times occur?