# Essay on Ch06 Sm Petty Fmpa6e

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CHAPTER 6

Financial forecasting, planning and budgeting SOLUTIONS TO PROBLEMS
6-2* Based upon the projections made, Farsight can expect to have total assets next year equal to \$1.8 million made up of the \$1 million in non-current assets plus \$0.8 million (0.2 × \$4 million) in current assets. These assets will be financed by known sources of funding comprised of the firm’s existing equity (\$0.8 million) plus the expected net increase after meeting dividend commitments – \$4 million × (5%) × (50%)] = \$0.1 million – plus payables and trade credit – (10%) × (\$4 million) = \$0.4 million) – which totals \$1.3 million (\$0.8 million + \$0.1 million + 0.4 million). This leaves \$0.5 million (\$1.8 million – \$1.3 million) which will need to be raised to meet the financing needs of the firm.

6-4* (a) Current assets1 \$16m Accounts payable2 \$8m Net fixed assets 15m Notes payable3 3m \$31m Debt 10m Equity 10m \$31m

3\$31 million – \$28 million = \$3 million (Balancing figure which equals estimated discretionary financing needs).
(b) Total financing requirements = \$31 million; however, spontaneous financing accounts for all but the \$3 million increase in notes payable (discretionary financing needed).
(c) The percent-of-sales method assumes no other information is available which would indicate a change in the observed relationship between sales and the expense item, asset or liability being forecast. Furthermore, the percent-of-sales method works best for projected sales levels that are very close to the base level sales used to determine the relevant ‘percent of sales’. The greater the difference in predicted and base-level sales, in general, the less accurate will be the percent-of-sales forecast. In this question, we are anticipating a significant increase in sales of \$30 million (\$50 million to \$80 million) which may affect the accuracy of the percent-of-sales method as a forecasting approach.
6-10 *(a) Average collection period (ACP) = = = 41 days (b) ACP = 30 =  Accounts receivable = \$295,890 Thus, the reduction in accounts receivable = Original A/R – Projected A/R = \$400,000 – \$295,890 = \$104,110

6-15* (a) Harrison Printing Cash Budget Worksheet
January to June 20x6

Nov Dec Jan Feb Mar Apr May June July Aug
Sales \$220,000 \$175,000 \$100,000 \$120,000 \$150,000 \$300,000 \$275,000 \$200,000 \$200,000 \$180,000
Collections:
Month of sale (20%) 44,000 35,000 20,000 24,000 30,000 60,000 55,000 40,000 First month (50%) 110,000 87,500 50,000 60,000 75,000 150,000 137,500 Second month (30%) 66,000 52,500 30,000 36,000 45,000 90,000 Total collections 173,500 126,500 120,000 171,000 250,000 267,500

Purchases 65,000 78,000 97,500 195,000 178,750 130,000 130,000 117,000
Payments (1-month lag) 65,000 78,000 97,500 195,000 178,750 130,000 130,000
Cash receipts (collections) \$173,500 \$126,500 \$120,000 \$171,000 \$250,000 \$267,500
Cash disbursements Purchases 78,000 97,500 195,000 178,750 130,000 130,000 Rent 10,000 10,000 10,000 10,000 10,000 10,000 Other expenditures 20,000 20,000 20,000 20,000 20,000 20,000 Tax payments 22,500 22,500 Interest on short-term borrowing 610 994 104 Total disbursements \$108,000 \$127,500 \$247,500 \$209,360 \$160,994 \$182,604
Net monthly change \$65,500 (\$1,000) (\$127,500) (\$38,360) \$89,006 \$84,896
Beginning cash balance 22,000 87,500 86,500 20,000 20,000 20,000 Additional financing needed (repayment) 61,000 38,360 (89,006) (10,354)
Ending cash balance \$87,500 \$86,500 \$20,000 \$20,000 \$20,000 \$94,542
Cumulative borrowing \$0 \$0 \$0 \$61,000 \$99,360 \$10,354 \$0

(b) No, the firm will not have sufficient funds to cover the \$200,000 note due in June. The firm will only have a cash balance of \$20,000 at the end of May 20x6 and a cash balance of \$94,542 at the end of June 20x6, still insufficient to repay a loan of \$200,000.

6.17* (a) Dingling Phone Company
Cash Budget Worksheet
July to…