Questions are attached

Application Assignment #5 – Lesson 6

Please take note that there are multiple questions/topics covered in this assignment. You need to show all your work, where applicable, don’t just provide an answer.

1. Stan was at his banker’s trying to get a short-term loan. “I need about $10,000 for three months, just until I get things straightened out. This is my situation: I got this nice order last February from Baker Company. Their bill was due last month, but so far I haven’t seen anything. Now I have another big order, this time from Gisher Construction and I need to order raw materials, but I cannot since Baker has not paid. Even when they do pay, it is only about 75% of what I will need to order to do the Gisher contract. Then, we are headed into our slow months; no one much does anything through the winter. And with the hurricane down in Florida, people are thinking twice before placing their orders.”

Stan was experiencing a number of cash flow problems that small businesses (and often larger businesses) face.

1. Identify five problems Stan is experiencing with Cash Flow?

1. Hal Carrier, of Bulltuff Stock Trailers, Inc., has asked for your help. In the last four months, he has had several checks written to suppliers that were refused by his bank because of nonsufficient funds. Now his main supplier, Alcoa Aluminum Supply Co., has cut off credit.

“We are sorry Hal,” Alcoa credit officer said, “but we simply cannot keep accepting your checks. Every time one bounces, it costs us at least $100 combined in processing fees and our internal accounting. You simply will have to pay cash or bring a cashier’s check for future purchases.”

Hal simply cannot understand why his checks keep bouncing. “We’ve plenty of sales,” he said, “and our customers pay pretty much as agreed. Right now I have only one customer who is as much as 60 days past due. My accountant, Bill Yant, assures me that our cash balance never goes negative. So why are my checks bouncing?

• Cash sales are 10% of total assets.

• Credit card sales are 10% of total sales and are collected the week following the sale. The credit card provider deducts 2.5% of the gross amount of each credit card sale. (For example, on a sale of $100, $2.50 is deducted.)

• Sales on credit are 80% of all sales. All credit sales are to dealers. Terms for dealers are “30-30-30,” that is, three equal payments made in each of the three months following the sale. Payments are considered late if they are not received by the 10th of the month in which they are due.

• Direct Materials, primarily aluminum, are 60% of the cost of building a trailer. Before credit was cut off, Bulltuff paid 30% on delivery and the remainder in 30 days. Now it must pay cash on delivery.

• Total cost of direct labor is 15% of the costs of building a trailer. Workers are paid each Friday for work performed the previous week. Withholding and employment taxes are paid each Friday, also.

• Variable costs combined (e.g.: materials and labor) are 50% of gross sales. Fixed costs are not allocated to the costs of trailers but are expensed evenly across the year.

• All other costs combined are treated as fixed costs, and total $1 million per year.

• Bulltuff leases its building and equipment and has no depreciation.

• Sales for the year were originally projected to be $2,450,000. However, given the current growth in sales. Hal now estimates that sales will be $5,000,000

• Sales for the first four months of the year have been:

  • • January $208,000

    • February $261,000

    • March $293,000

    • April $328,000

1. 1. What is causing Hal’s cash flow problems?

   2. Develop detailed plan that you can present to him in order to help him address the problems.

1. Sequoia Furniture Company’s sales over the past three months, half of which are for cash, were as follows:

March - $400,000

April - $650,000

May - $520,000

1. 1. Assume that Sequoia’s collection period is 60 days. What would its cash receipts in May? What would be its accounts receivables balance at the end of May?

   2. Now assume that Sequoia’s collection period is 45 days. What would be its cash receipts in May? What would be its accounts receivables balance at the end of May?

1. You own a wholesale distributor of household appliances, and you want to estimate your company’s cash balances for the first three months of 2015. Using the financial information provided on the next page, construct a monthly cash budget for your business for January through March 2015. Your sales are 20% for cash, while the rest on 30-day credit terms. Your purchases are all on 60-day credit terms.

   1. Construct a cash budget for the first three months of 2018.

   2. Does it appear from your results that you should be concerned about your cash balances? Do you have enough cash or do you have to seek a bank loan to make ends meet in January, February or March 2018?

1. Poll Auto Parts, a family-owned auto parts store, began January with $10,200 cash. Management forecasts that collections from credit customers will be $11,700 in January and $15,000 in February. The store is scheduled to receive $7,000 cash on a business note receivable in January. Projected cash payments include inventory purchases ($14,500 in January and $13,900 in February) and operating expenses ($2,900 each month).

Poll Auto Parts’ bank requires a $10,000 minimum balance in the store’s checking account. At the end of any month when the account balance dips below $10,000 the bank automatically extends credit to the store in multiples of $1,000. Poll Auto Parts borrows as little as possible and pays back loans in quarterly installments of $2,500, plus 5% interest on the entire unpaid principal. The first payment occurs three months after the loan.

1. 1. Prepare Poll Auto Parts’ cash budget for January and February.

   2. How much cash will Poll Auto Parts borrow in February if collections from customers that month total $14,000 instead of $15,000

1. Using the information provided on the next page:

1. Construct a monthly cash budget for October through December 2014.

2. Based on your analysis, will Noble enjoy cash flow surplus, or require external financing in October, November, December? How much will he have in surplus or will he need by the end of the year?