Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 26, Problem 2MC
Rework the cash budget and short-term financial plan assuming Keafer changes to a minimum cash balance of $90,000.
KEAFER MANUFACTURING
WORKING CAPITAL MANAGEMENT
You have recently been hired by Keafer Manufacturing to work in its established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard boxes in a variety of sizes for different purchasers. Adam Keafer, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company basically puts all receivables in one pile and all payables in another, and a part-lime bookkeeper periodically comes in and attacks the piles. Because of this disorganized system, the finance area needs work, and that's what you've been brought in to do.
The company currently has a cash balance of $210,000, and it plans to purchase new machinery in the third quarter at a cost of 5390,000. The purchase of the machinery will be made with cash because of the discount offered for a cash purchase. Adam wants to maintain a minimum cash balance of $135,000 to guard against unforeseen contingencies. All of Keafer’s sales to customers and purchases from suppliers are made with credit, and no discounts are offered or taken.
The company had the following sales each quarter of the year just ended:
After some research and discussions with customers, you’re projecting that sales will be 8 percent higher in each quarter next year. Sales for the first quarter of the following year are also expected to grow at 8 percent. You calculate that Keafer currently has an accounts receivable period of 57 days and an accounts receivable balance of $675,000. However, 10 percent of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely that this portion will never be collected.
You’ve also calculated that Keafer typically orders supplies each quarter in the amount of 50 percent of the next quarter’s projected gross sales, and suppliers are paid in 53 days on average. Wages, taxes, and other costs run about 25 percent of gross sales. The company has a quarterly interest payment of $185,000 on its long-term debt. Finally, the company uses a local bank for its short-term financial needs. It currently pays 1.2 percent per quarter on all short-term borrowing and maintains a
Adam has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs.
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Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its growth. The bank requires financial statements before approving the loan.
Required:
Classify each cost listed below as either a product cost or a period cost for the purpose of preparing financial statements for the bank.
Costs
Product Cost / Period Cost
1. Depreciation on salespersons’ cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods warehouse.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisors’ salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are…
Suppose that Demont has been given a summer job as an intern at Isaac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help it finance its growth. The bank requires financial statements before approving such a loan.
Classify each cost listed below as either product costs or period costs for the purpose of preparing the financial statements for the bank.
Costs Product Cost/Period Cost
1. Depreciated on salesperson's cars
2. Rent on equipment used in the factory
3. Lubricants used for machine maintenance
4. Salaries of personnel who work in the finished goods warehouse
5. Soap and paper towels used by factory workers at the end of a shift
Suppose that Demont has been given a summer job as an intern at Isaac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help it finance its growth. The bank requires financial statements before approving such a loan.
Classify each cost listed below as either product costs or period costs for the purpose of preparing the financial statements for the bank.
Cost Product Cost/Period Cost
1. Factory supervisors' salaries
2. Heat, water, and power consumed in the factory
3. Materials used for boxing products for shipment overseas. Units are normally boxed.
4. Advertising costs
5. Workers' compensation insurance for factory employee
Chapter 26 Solutions
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