the module one and two (business

| June 4, 2016

Question
This problem builds upon each of the different modules to a logical analysis and
conclusion, emphasizing the most important aspects of business finance through the
completion of each of the four modules. Following is a brief description of each of the
modules and the course objectives that are covered with the module.
Module One this module will emphasize the students grasp of the formation of
financial statements and the development of analytical measures to assess the financial
condition of the business firm. (CO 1.2, 2.1)
Module Two this module will focus upon the development of pro forma financial
statements given various planning assumptions. (CO 1.4)
Module Three this module will require the student to apply working capital analysis
techniques and assess the cost of debt to a business firm. (CO 2.2, 3.2, 3.3, 3.4)
Module Four this final module will encompass the application of time-value of money
concepts to the business firms decisions related to the firms overall cost of capital. (CO
4.1, 4.4)
General Guidelines:
The proper, and professional, presentation of solutions associated with this
comprehensive problem are part of the overall grading of each module. Because all
analytic work is to be completed in Excel, but the solution submission is to be in Word,
you must become familiar with importing schedules from Excel into Word in a
professional manner. Please see the instructions contained in the Getting Started folder
in Blackboard.
Each module is due as indicated in the Learning Activities folder for the particular week
and is to be uploaded into the Assignment as shown in the Grade Center.

Sales: 235 per 1000 (widgets).
Module Two 56 points
Smith-John makes standard sized widgets for the frazzle industry. These widgets are
sold for $235 per thousand. Mr. Smith and Mr. John are asking you to assist with
preparations for a meeting with their banker to arrange for financing the company for
possible expansion. Based on a sales forecast (below) and other data, Mr. Smith and
Mr. John would like you to prepare a monthly cash budget, monthly and quarterly pro
forma income statements, a pro forma quarterly balance sheet, and all necessary
supporting schedules for the first quarter of 2012.
Sales forecast (in units):
Sales – units
Sales – $’s

January
2,150,000
$
505,250

February
2,350,000
$
552,250

March
1,950,000
$
458,250

April
1,750,000
$
411,250

May
2,150,000
$
505,250

Prior history shows that the company collects 75% of the sales in the first month after
the sale, 20% in the second month after the sale, and the remainder in the third month
after the sale. The company pays for materials purchased for production the month
after receipt. In general, Mr. Smith and Mr. John like to keep 1.5 months supply of
inventory on-hand at month-end in anticipation of sales. Inventory at the beginning of
December was 2,400,000 units. (This was not equal to the desired inventory level of
the desired 1.5 months supply.) Additionally, the unit sales for October, November and
December were 1,900,000, 1,850,000 and 1,325,000, respectively.
The major cost of production is the purchase of raw materials in the form of steel rods,
which are cut, threaded, and finished. Last year raw material costs were $63 per 1,000
widgets, but Mr. John was notified by the purchasing department that the cost was
going to rise to $68 per 1,000 widgets. The company uses FIFO inventory accounting
and the purchases for materials are paid for in the month following the purchase. Labor
costs are relatively constant at $22 per thousand widgets, since workers are paid on a
piecework basis. Overhead is allocated at $12 per thousand widgets and selling and
administrative costs are constant at 28% of sales revenue. Labor expense and
overhead are direct cash outflows paid in the month incurred, while interest and taxes
are paid quarterly. In addition, the company maintains a dividend payout ratio of 40%
which is paid quarterly.
The company usually maintains a minimum cash balance of $45,000, borrows notes
payable if needed, and puts any excess cash into marketable securities. The average
tax rate is 30%. Marketable securities are sold before funds are borrowed when a cash
shortage is faced. Ignore the interest on short-term borrowings. Interest on the long-

term bonds of $9,000 is paid in March, but is allocated over each month for accounting
purposes. Taxes are paid in March, but are allocated over each month for accounting
purposes. The Dividend payment is made at the end of March. In addition, the
company is projecting the purchase of a new piece of manufacturing equipment in
March for $50,000 that will be cash on delivery.
Required part 1: Prepare a monthly pro forma income statement and cash budget,
and a quarter-ended income statement; make sure to include a sales forecast,
production schedule, schedule of cost of goods sold, schedule of cash receipts,
schedule of cash payments, net cash flow schedule, and the cash budget. All
supporting schedules should include all three months of the quarter. s-vc= cm
Required part 2: Based on the date prepared in part 1, prepare a balance sheet as of
the quarter-ended date. Make sure to include a schedule that identifies the calculation
of accounts receivable, inventory, and accounts payable balances for each month and
for the quarter-ended period.
As of the year ended December 31, 2011, the Smith-John balance sheet was as follows:
Smith-John, Inc., Balance Sheet as of December 31, 2011
ASSETS
Current Assets:
Cash
Marketable Securities
Accounts Receivable
Inventory
Total current assets
Fixed assets, net
Total Assets

$

$

15,000
218,000
322,525
555,525
800,000
1,355,525

LIABILITIES & EQUITY
Current Liabilities:
Accounts payable
$
Tax & interest payable
Notes payable
Total current liabilities
Long-term debt
Total liabilities

125,002
125,002
400,000
525,002

Equity:
Common stock
Retained earnings
Total equity

400,000
430,523
830,523

Total Liab’s & Equity

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