Assignment1_CashManagementCase_2019
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Case 1: Cash Management
Ms. Amanda Truly is the new CFO of Mind and Body, Inc., which produces popular yoga and Pilates videos. Ms. Truly is concerned about the company’s cash flow management, and would like to get a
better "feel" for the way cash flows are managed at Mind and Body, Inc. The CEO of the company, Mr. Lawrence Jackson, is worried about the company’s cash situation. Although the company has consistently produced positive net income, the level of its short-term borrowing is worrisome. Mr. Jackson would like Ms. Truly to construct a cash budget for next year so that they can devise a short-term financial policy that would effectively suit the company’s cash flows. To this end, Mr. Jackson has provided Ms. Truly with the company’s most recent Statement of Comprehensive Income, Statement of Financial Position, and Cash Budget, and the following disparate information:
Purchases from suppliers = 70% of predicted sales for the next month
Accounts payable period = 30 days
Wages and other expenses = 20% of predicted sales
Capital expenditures (computer system purchase) in June = $500,000
Long-term debt interest expense = $50,000
Dividends = $30,000 per quarter
Minimum cash balance = $200,000
Short-term cost of borrowing = 13% APR, compounded monthly
Long-term cost of borrowing = 10% APR, compounded monthly
Income taxes from last year’s income will be paid monthly in this year
Interest expense on accumulated short-term expense must be paid in the following month
Customer payments: 50% in the month of sales, 30% pay in the month after sales, and 20% two months after sales
Bad debt = ~ 2% if customers have not made payment after 60 days
Table 2: Last Year's Statement of Financial Position
Cash $200,000
Accounts payable
140,000
Inventory
140,000
Notes payable
41,520
Accounts receivable
792,080
Current liabilities
181,520
Current assets
1,132,080
Long-term debt
6,000,000
Common stock
2,500,000
Net fixed assets
9,004,814
Retained earnings
1,455,374
Total owners' equity
3,955,374
FNCE 371v5
Assignment 1, Case 1 of 3
October 2019
Table 1: Last Year's Statement of Comprehensive Income
Sales
$10,944,25
0
Cost of goods sold
7,660,975
Wages and other expenses 2,188,850
Earnings before depreciation, interest, and taxes
1,094,425
Depreciation
100,000
Earnings before interest and taxes
994,425
Interest expense
603,760
Taxable income
390,665
Taxes 140,640
Net income
250,025
Dividends
120,000
Additions to retained earnings
130,025
2
Total assets
10,136,894
Total liabilities & owners' equity
10,136,894
Table 3: Cash Budget
Cash collections:
January
February
March
April
May
June
Sales
185,000
370,000
740,000
2,035,000
203,500
407,000
Month 0 collections
92,500
185,000
370,000
1,017,500
101,750
203,500
Month -1 collections
540,000
55,500
111,000
222,000
610,500
61,050
Month -2 collections
172,872
352,800
36,260
72,520
145,040
398,860
Total collections
805,372
593,300
517,260
1,312,020
857,290
663,410
Beginning accounts receivable
1,076,400
452,500
222,000
444,000
1,165,500
508,750
Sales
185,000
370,000
740,000
2,035,000
203,500
407,000
Cash collections
805,372
593,300
517,260
1,312,020
857,290
663,410
Ending accounts receivable
452,500
222,000
444,000
1,165,500
508,750
244,200
Cash disbursements:
January
February
March
April
May
June
Beginning accounts payable
129,500
259,000
518,000
1,424,500
142,450
284,900
Purchases
259,000
518,000
1,424,500
142,450
284,900
466,200
Payment of accounts Payable
129,500
259,000
518,000
1,424,500
142,450
284,900
Ending accounts payable
259,000
518,000
1,424,500
142,450
284,900
466,200
Payment of accounts payable
129,500
259,000
518,000
1,424,500
142,450
284,900
Wages and other expenses
37,000
74,000
148,000
407,000
40,700
81,400
Taxes
20,833
20,833
20,833
20,833
20,833
20,833
Capital expense
0
0
0
0
0
0
ST interest expense
400
0
0
0
897
0
LT interest expense
50,000
50,000
50,000
50,000
50,000
50,000
Dividends
0
0
30,000
0
0
30,000
Cash disbursements
237,733
403,833
766,833
1,902,333
254,880
467,133
Cash collections
805,372
593,300
517,260
1,312,020
857,290
663,410
FNCE 371v5
Assignment 1, Case 1 of 3
October 2019
3
Cash disbursements
237,733
403,833
766,833
1,902,333
254,880
467,133
Net cash inflow
567,639
189,467
–249,573
–590,313
602,410
196,277
Cash Budget:
January
February
March
April
May
June
Beginning cash balance
200,000
767,639
957,105
707,532
200,000
719,629
Net cash inflow
567,639
189,467
–249,573
–590,313
602,410
196,277
Ending cash balance
767,639
957,105
707,532
117,219
802,410
915,905
Minimum cash balance
200,000
200,000
200,000
200,000
200,000
200,000
Surplus/deficit
567,639
757,105
507,532
–82,781
602,410
715,905
Short-term borrowing
0
0
0
82,781
0
0
Repayment of ST debt
0
0
0
0
82,781
0
Cumulative ST debt
0
0
0
82,781
0
0
ST interest expense
0
0
0
897
0
0
Table 3: Cash Budget (Cont.)
Cash collections:
July
August
September
October
Novembe
r
December
Sales
666,000
2,442,000
305,250
610,500
980,000
2,000,000
Month 0 collections
333,000
1,221,000
152,625
305,250
490,000
1,000,000
Month -1 collections
122,100
199,800
732,600
91,575
183,150
294,000
Month -2 collections
39,886
79,772
130,536
478,632
59,829
119,658
Total collections
494,986
1,500,572
1,015,761
875,457
732,979
1,413,658
Beginning accounts receivable
244,200
414,400
1,354,200
641,025
366,300
612,100
Sales
666,000
2,442,000
305,250
610,500
980,000
2,000,000
Cash collections
494,986
1,500,572
1,015,761
875,457
732,979
1,413,658
Ending accounts receivable
414,400
1,354,200
641,025
366,300
612,100
1,196,000
Cash disbursements:
July
August
September
October
Novembe
r
December
Beginning accounts payable
466,200
1,709,400
213,675
427,350
686,000
1,400,000
Purchases
1,709,400
213,675
427,350
686,000
1,400,000
140,000
Payment of accounts payable
466,200
1,709,400
213,675
427,350
686,000
1,400,000
Ending accounts payable
1,709,400
213,675
427,350
686,000
1,400,000
140,000
Payment of accounts payable
466,200
1,709,400
213,675
427,350
686,000
1,400,000
FNCE 371v5
Assignment 1, Case 1 of 3
October 2019
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- Josh and Amy are finance trainees at a company which has been reporting a positive cash flow for the last 5 years. Both Josh and Amy have learned in their finance courses at the university that “cash is king” and is more important than reported profits by a company. Guided by this knowledge, none of them feels a need to review the company’s cash flow pattern over time. Are they necessarily correct in their understanding about a firm’s long-term cash flow situation?arrow_forwardYou have joined the companies finance team couple of months ago and went through a series of on job rotation and training. Today, the team welcomes a new member and your supervisor asks you take care of the new employee’s onboarding to the team. In particular, your supervisor asks you to tackle the following issues: 1. Describe the cash flows between a firm and its stakeholders. 2. The three fundamental decisions the finance team is concerned with, and how do they affect the firm’s balance sheet? 3. Explain why profit maximization is not the best goal for a company. What is an appropriate goal? 4. What are some of the external and internal factors that affect a firm’s stock price? What is the difference between these two types of factors? 5. Identify the sources of agency costs. What are some ways a company can control these costs? 6. Give an example of a conflict of interest in a business setting, other than the one involving the real estate agent discussed in the text.arrow_forwardA senior financial executive for a large public company remarked to a stock market analyst: I don ’ t know why you people worry so much about what is in our statement of cash flows. Managing cash flow is our responsibility as managers; it involves paying close attention to cash on a daily basis. Why don ’ t you pay attention to our profit and just forget about cash flow? We ’ ll look after that! Respond to the executive ’ s comments. You do not have to agree or disagree entirely.arrow_forward
- I need help filling out the excel template with this given information. Kate has just completed her first year of Kate's Cards. She has been preparing monthly income statements and balance sheets, so she knows that her company has been profitable and that there is cash in the bank. She has not, however, prepared a statement of cash flows. Kate's provides you with the year-end income statement and balance sheet and asks that you construct an statement of cash flows for Kate's Cards.Additional information:1. There were no disposals of equipment during the year2. Dividends in the amount of $1,300 were paid in cash during the year.3. Prepaid expenses relate to operating expenses.Requireda. Construct an statement of cash flows for Kate's Cards for the year-ended August 31, 2019, using the indirect method. Hint: Since this was Kate's first year of operations, the beginning balance sheet account balances were zero.b. Construct an statement of cash flows for Kate's Cards for the year ended…arrow_forwardWhy is cash generated from operations usually larger than net profit? A business commentator made the following remark during a discussion of the financial performance of a large, but struggling, company: These accountants spend lots of money to create complicated financial statements, especially income statements, which use what they call ‘accrual’ accounting. Then they take away all the accruals and supposedly return us to the cash profit number (‘cash flow from operations’) we would have had anyway, if they hadn’t bothered with accrual accounting in the first place! Why don’t they just give us the cash profit and leave it at that? If you were an accountant involved in the discussion, and everyone turned to you to hear your response to the commentator, what would you say?arrow_forwardAssume you are the controller of a large corporation and the ceo has requested that you explain to them why the net income that you are reporting for the year is so low when the cell owes for a fact that cash accounts are much higher at the end of the year than they were at the beginning of the year write a memo to the ceo to offer some possible explanations for the disparity between financial statement net income and the change in cash during the yeararrow_forward
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