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Chapter 2: 1DQ (page 112)

What are the basic benefits and purposes of developing pro forma statements and a cash budget?

Short Answer

Expert verified

The proforma statements and the cash budgets enable the company to determine the future requirement of funds or assets for the future financial projects of the organization. Creditors and bankers can also use these statements to make credit decisions.

Step by step solution

01

Purpose of developing the pro forma statements and the cash budgets

The purpose of proforma financial statements and the cash budgets of the company is to provide a comparison of the historical data and projection of the future projects.

02

Benefits of developing the pro forma statements and the cash budget

The development of the proforma financial statements and the cash budgets can help the company in predicting future incomes. By using these statements an organization can develop a plan to deal with the future risk involved in the projects. It is an estimation of the future expenses to be incurred by an organization to complete the project successfully. In addition, bankers and creditors can use these financial statements to make credit decisions for the company.

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Most popular questions from this chapter

In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status

Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.

a. Compute return on assets at year-end for 2007, 2009, 2012, 2014, and 2016.

(Use $29,000 in the numerator for each year.)

The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.

Stud Clothier

Balance sheet 20X1

Assets

Liabilities and Equity

Cash

\)60,000

Account payable

\(220,000

Account receivable

240,000

Accrued taxes

30,000

Inventory

350,000

Bonds payable (long term)

150,000

Plant and equipment

410,000

Common stock

80,000

Paid in capital

200,000

Retained earnings

380,000

Total assets

\)1,060,000

Total LIbilities and Equity

$1,060,000

Compute the following:

c. Debt to total assets ratio.

Lemon Auto Wholesalers had sales of \(1,000,000 last year, and cost of goods sold represented 78 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was \)11,000 and interest expense for the year was \(8,000. The firm’s tax rate is 30 percent.

a. Compute earnings after taxes.

b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 14 percent of sales, sales can be increased to \)1,050,900. The extra sales effort will also reduce cost of goods sold to 74 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at \(11,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to \)15,800. The firm’s tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto Wholesalers. Will her ideas increase or decrease profitability?

Easter Egg and Poultry Company has \(2,000,000 in assets and \)1,400,000 of debt. It reports net income of $200,000.

c. If the firm has an asset turnover ratio of 2.5 times, what is the profit margin

(return on sales)?

A firm has sales of \(3 million, and 10 percent of the sales are for cash. The year-end accounts receivable balance is \)285,000. What is the average collection period? (Use a 360-day year.)
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