The Marsh Corporation produces fasteners that it sells for $155 per thousand. It provides sales forecasts for the next few months along with historical financial information. The document requests cash budgets, income statements, and balance sheets be prepared for the first quarter to present to the banker when arranging financing. Key information includes rising material costs, accounts receivable and inventory terms, expenses, and the current financial position of the company.
The Marsh Corporation produces fasteners that it sells for $155 per thousand. It provides sales forecasts for the next few months along with historical financial information. The document requests cash budgets, income statements, and balance sheets be prepared for the first quarter to present to the banker when arranging financing. Key information includes rising material costs, accounts receivable and inventory terms, expenses, and the current financial position of the company.
The Marsh Corporation produces fasteners that it sells for $155 per thousand. It provides sales forecasts for the next few months along with historical financial information. The document requests cash budgets, income statements, and balance sheets be prepared for the first quarter to present to the banker when arranging financing. Key information includes rising material costs, accounts receivable and inventory terms, expenses, and the current financial position of the company.
The Marsh Corporation produces fasteners that it sells for $155 per thousand. It provides sales forecasts for the next few months along with historical financial information. The document requests cash budgets, income statements, and balance sheets be prepared for the first quarter to present to the banker when arranging financing. Key information includes rising material costs, accounts receivable and inventory terms, expenses, and the current financial position of the company.
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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 inventory and finances of the company. He Estimates sales for the following months to be.
Month
Fasteners
Jan
$263,000
1,700,000
Feb
$186,000
1,200,000
Mar
$217,000
1,400,000
April
$310,000
2,000,000
May
$387,500
2,500,000
Last year Marsh corp sales were $175,000 in November and $232,500 in December.(1,500,000 fasteners. Mr. Marsh is preparing for a meeting with his banker to arrange the financing for the first quarter. Based on his sales focast and the following information he provided please prepare a monthly cash budget, monthly and quaterly pro forma income statements, a pro forma quarterly balance sheet and all the necessary supporting schedules for the first quater.
Past histroy shows that the Marsh corp collects 50 % of it accounts recievable in the normal 30 day period( the month after the sale)and the other 50 % in 60 days. It pays for materials 30 days after receipt. In general mr. Marsh likes to keep a 2 months supply in inventory in anticipation of sales. Inventory at the begining of December was 2,600,000 units.
The major cost of the production is the purchase of raw materials in the form of stell rods,which are cut threaded and finished.last year raw material costs were $ 52.00 per 1,000 fasteners but mr. Marsh has just been notifed that material cost have risen,effective January1,to $60.00 per 1,000 fasteners. The March corp uses fifo inventory accounting. Labor costs are relitivly constant at $20.00 per thousand fasteners, since workers are paid on a piece work basis.
Over head is allocated at $10.00 per thousand units and selling and administrative expense is 20% os sales. Labor expenses and overhead are direct cash outflows paid in the month incurred,while intrest and
taxes are paid
quaterly.
The corp usually maintains a min cash budget of 25,000 and it puts its excess cash into marketable securities The average tax rate is 40% and mr, marsh usaullt pays out 50% of the net income in dividens and to stock holders. Marcketable securities are sold before funds are borrowed when when a cash shortage is faced. Ignore the intrest on any short-term borrowings. Intreat on the long-term debt is paid in March as are the taxes and dividens.
As of year-end, the marsh Corp balance sheet was as followed.
December 31,200X Current Assets Cash $30,000 Accounts receivable 320,000 inventory
237,000
Total assets
$587,800
Fixed assets plant and equipment 1,000,000 Less: accumulated depreciation Total assets
200,000
800,000 ________ 1,387,800
Liabilities and stock holders equity
Accounts payable notes payable
$93,600 0
Long-term debt,8 percent
common stock retained earnings
400,000
504,200 390,000
total liabilities and stockholders equity $1,387,800
Solution:Marsh Corporation Forecasting with Seasonal Production
Projected Unit Sales +Desired Ending Inventory (2 months supply) Beginning Inventory 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
Monthly Cash Payments
Dec.
Jan.
Feb.
Mar.
Units to be produced 1,800,000 1,400,000 2,000,000 2,500,000 Materials (from previous $93,600 $84,000 $120,000 month) Labor ($20 per thousand $28,000 $40,000 $50,000 units) Overhead ($10 per thousand $14,000 $20,000 $25,000 units) Selling & adm. expense (20% $52,700 $37,200 $43,400 of sales) Interest $8,000 Taxes (40% tax rate) $64,560* Dividends $48,420* Total Payments $188,300 $181,200 $359,380 *See the pro forma income statement, which follows this material later on, for the development of these values.
Marsh Corporation Monthly Cash Receipts
Sales Collections (50% of Previous month) Collections (50% of 2 months earlier) Total Collections
Nov. Dec. Jan. Feb. Mar. $175,000 $232,500 $263,500 $186,000 $217,000
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 Cost of Goods Sold Gross Profit Selling and Admin. Expense Interest Expense Net Profit Before Tax Taxes Net Profit After Tax Less: Common Dividends Increase in Retained Earnings
Ending inventory as of December 31 was 2,900,000, therefore, sales for
January and February had a cost of goods sold per thousand units of $82, and March sales reflect the increased cost of $90 per thousand units using FIFO inventory methods. Pro Forma Balance Sheet (March) Assets Current Assets: Cash....................... Accounts Receivable Inventory............... Plant & Equip: Net Plan Total Assets
25,000 310,000 405,000
800,000 $1,540,000
Liabilities & Stockholders' Equity Current Liabilities: Accounts Payable Notes Payable Long-Term Debt Stockholders' Equity: Common Stock Retained Earnings, Total Liabilities & Stockholders' Equity
Cash = ending cash balance from cash budget in March Accounts receivable $217,000 = all of March sales 93,000 plus 50% of Feb. $310,000 sales Inventory = ending inventory in March of 4,500,000 units at $90 per thousand Plant and equipment did not change since we did not include depreciation. RE = Old RE + (NI dividends) = $390,000 + ($96,840 $48,240) = $438,420
