Question:The Marsh company makes standard size 2 inch fasteners,which it sells for $155 per thousand. Mr. Marsh is the majority owner and manages the inentory and finances of the company. !e "stimates sales for the following months to #e.
Month
asteners
%an
$2&',(((
1,)((,(((
e#
$1*&,(((
1,2((,(((
Mar
$21),(((
1,+((,(((
pril
$'1(,(((
2,(((,(((
May
$'*),5((
2,5((,(((
-ast year Marsh corp sales were $1)5,((( in oem#er and $2'2,5(( in /ecem#er /ecem#er.01,5((,((( .01,5((,((( fasteners. Mr. Marsh is preparing for a meeting with his #anker to arrange the f inancing for the first uarter. ased on his sales focast and the follow ing information he proided please prepare a monthly cash #udget, monthly and uaterly pro forma income statements, a pro forma uarterly #alance sheet and all the necessary supporting schedules for the first uater.
3ast histroy shows that the Marsh corp collects 5( 4 of it accounts reciea#le in the normal '( day period0 the month after the saleand the other 5( 4 in &( days. 6t pays for materials '( days after receipt. 6n general mr. Marsh likes to keep a 2 months supply in inentory in anticipation of sales. 6nentory at the #egining of /ecem#er was 2,&((,((( units.
The major cost of the production is the purchase of raw materials in the fo rm of stell rods,which are cut threaded and finished.last year raw material costs were $ 52.(( per 1, ((( fasteners #ut mr. Marsh has just #een notifed that material cost hae risen,effectie %anuary1,to $&(.(( per 1,((( fasteners. The March corp uses fifo inentory accounting. -a#or costs are relitily constant at $2(.(( per thousand fasteners, since workers are paid on a piece work #asis.
7er head is allocated at $1(.(( per thousand units and selling and administratie e8pense is 2(4 os sales. -a#or e8penses and oerhead are direct cash outflows paid in the month incurred,while intrest and
ta8es are paid uaterly.
The corp usually maintains a min cash #udget of 25,((( and it puts its e8cess cash into marketa#le securities The aerage ta8 rate is +(4 and mr, marsh usaullt pays out 5(4 of the net income in diidens and to stock holders. Marcketa#le securities are sold #efore funds are # orrowed when when a cash shortage is faced. 6gnore the intrest on any short9term #orrowings. 6ntreat on the long9term de#t is paid in March as are the ta8es and diidens.
s of year9end, the marsh :orp #alance sheet was as f ollowed.
/ecem#er '1,2((; :urrent ssets :ash $'(,((( ccounts receia#le '2(,((( inentory
2'),(((
Total assets
$5*),*((
i8ed assets plant and euipment 1,(((,((( -ess< accumulated depreciation Total assets
2((,(((
*((,((( ======== 1,'*),*((
-ia#ilities and stock holders euity ccounts paya#le notes paya#le
$>',&((
(
-ong9term de#t,* percent common stock retained earnings
+((,(((
5(+,2(( '>(,(((
total lia#ilities and stockholders euity $1,'*),*((
Solution:-
Marsh Corporation Forecasting with Seasonal Production
Projected Unit Sales Desired !nding "n#entor$ %& 'onths suppl$( )*eginning "n#entor$ Units to be Produced
Dec.
Jan.
Feb.
Mar.
1,500,000
1,700,000
1,200,000
1,400,000
2,900,000
2,600,000
3,400,000
4,500,000
2,600,000
2,900,000
2,600,000
3,400,000
1,800,000
1,400,000
2,000,000
2,500,000
Monthl$ Cash Pa$'ents Dec.
Jan.
Feb.
Mar.
Units to be 1,800,000 1,400,000 2,000,000 2,500,000 produced Materials %+ro' pre#ious $93,600 $84,000 $120,000 'onth( ,abor %& per thousand $28,000 $40,000 $50,000 units( /#erhead %0 per thousand $14,000 $20,000 $25,000 units( Selling 1 ad'. e2pense %&3 $52,700 $37,200 $43,400 o+ sales( "nterest $8,000 4a2es %53 ta2 $64,560* rate( $48,420* Di#idends 4otal Pa$'ents $188,300 $181,200 $359,380 *See the pro forma income statement, which follows this material later on, for the deelopment of these al!es"
Marsh Corporation Monthl$ Cash 6eceipts
Sales #ollections 50% of &reio!s month' #ollections 50% of 2 months earlier' (otal #ollections
7o#. Dec. Jan. Feb. Mar. $175,000 $232,500 $263,500 $186,000 $217,000
87,500 $116,250
131,750
93,000
87,500
116,250
131,750
$203,750 $248,000 $224,750 Monthl$ Cash Flow
#ash )eceipts #ash &aments +et #ash low
Januar$ $203,750 188,300 15,450
Februar$ $248,000 181,200 66,800
March $224,750 359,380 134,630'
Marsh Corporation Cash Budget
+et #ash low -e.innin. #ash -alance #!m!latie #ash -alance /oans and )epaments' #!m!latie /oans aretale Sec!rities #!m!latie aretale Sec!rities ndin. #ash -alance
Januar$ $15,450 30,000 $45,450 0 0 20,450
Februar$ $66,800 25,000 $91,800 0 0 66,800
March $134,630' 25,000 $109,630' 47,380 47,380 87,250'
20,450 $25,000
87,250 $25,000
0 $25,000
Marsh Corporation Pro Forma Income Statement
Sales #ost of oods Sold ross &rofit Sellin. and dmin" pense nterest pense +et &rofit -efore (a (aes +et &rofit fter (a /ess #ommon :iidends ncrease in )etained arnin.s
Jan. $263,500 139,400 124,100
Feb. $186,000 98,400 87,600
Mar. $217,000 126,000 91,000
4otal $666,500 363,800 302,700
52,700 2,667
37,200 2,667
43,400 2,666
133,300 8,000
$ 68,733 27,493
$ 47,733 19,093
$ 44,934 17,974
$161,400 64,560
$ 41,240
$ 28,640
$ 26,960
$ 96,840 48,420 $ 48,420
Marsh Corporation Cost of Goods Sold
aterial""""""""""" /aor""""""""""""""" ;erhead"""""""""
Unit Cost per thousand be+ore Januar$ 0st $52 20 10 $82
Unit cost per thousand a+ter Januar$ 0st $60 20 10 $90
ndin. inentor as of :ecemer 31 was 2,900,000, therefore, sales for
ssets #!rrent ssets #ash""""""""""""""""""""""" cco!nts )eceiale nentor""""""""""""""" &lant = ?!ip +et &lan (otal ssets
$
25,000 310,000 405,000
800,000 $1,540,000
/iailities = Stocholders> ?!it #!rrent /iailities cco!nts &aale +otes &aale /on.(erm :et Stocholders> ?!it #ommon Stoc )etained arnin.s, (otal /iailities = Stocholders> ?!it
$ 150,000 47,380 400,000 504,200 438,420 $1,540,000
planation of #han.es in the -alance Sheet #ash @ endin. cash alance from cash !d.et in arch cco!nts receiale $217,000 @ all of arch sales 93,000 pl!s 50% of e" $310,000 sales nentor @ endin. inentor in arch of 4,500,000 !nits at $90 per tho!sand &lant and e?!ipment did not chan.e since we did not incl!de depreciation" ) @ ;ld ) A + B diidends' @ $390,000 A $96,840 B $48,240' @ $438,420
