Question 4-7DQ What conditions would help make ... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: Question 4-7DQ (page 112)

What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?

Short Answer

Expert verified

The percent-of-sales forecast is only as good as the functional relationship of assets and liabilities to sales. Past cash budgets and financial statements accurately depict the future. The percent of sales method will give values that reasonably represents the value derived through the pro forma statements and the cash budgets.

Step by step solution

Cash budgets

Cash budgets is prepared by an organization to estimate the future cash flows of the business over the specified period of time.

Conditions that would helps in making the percent of sales forecast almost as accurate as pro forma financial statement and the cash budgets

The percent of sales method links sale data to company鈥檚 balance sheet and income statements. It is almost accurate as pro forma financial statements and the cash budgets because it is based on the past information that accurately represents the future. It gives a clear idea for cash flows in the future.

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Income statement
Sales	\(250,000
Expenses	192,000
Earnings before interest and taxes	\)58,000
Interest	7,500
Earnings before taxes	\(50,500
Taxes	15,500
Earning after taxes	\)35,000
Dividends	\(7,000

BALANCE SHEET
Assets		Liabilities and Stockholder鈥檚 equity
Cash	\)8,500	Accounts payable	\(26,400
Accounts receivable	63,000	Accrued wages	2,350
Inventory	91,000	Accrued taxes	3,750
Current assets	\)162,500	Current liabilities	\(32,500
Fixed assets	85,000	Notes payable	7,500
		Long term debts	17,500
		Common stock	125,000
		Retained earnings	65,000
Total assets	\)247,500	Total liabilities and stockholder鈥檚 equity	$247,500

SNIDER CORPORATION
Balance sheet
December 31, 20X1
Assets
Current assets:
Cash	\(52,200
Marketable securities	24,400
Accounts receivable (net)	222,000
Inventory	238,000
Total current assets	\)536,600
Investments	65,900
Plant and equipment	\(615,000
Less: accumulated depreciation	(271,000)
Net plant and equipment	\)344,000
Total assets	\(946,500
Liabilities and stockholder鈥檚 equity
Current liabilities:
Account payables	\)93,400
Notes payable	70,600
Accrued taxes	17,000
Total current liabilities	\(181,000
Long term liabilities:
Bonds payable	\)153,200
Total liabilities	\(334,200
Stockholder鈥檚 equity
Preferred stock, \)50 per value	\(100,000
Common stock, \)1 par value	80,000
Capital paid in excess of par	190,000
Retained earnings	242,300
Total stockholder鈥檚 equity	\(612,300
Total liabilities and stockholder鈥檚 equity	\)946,500

SNIDER CORPORATION
Income statement
For the year ending December 31, 20X1
Sales (on credit)	\(2,064,000
Less: cost of goods sold	1,313,000
Gross profit	\)751,000
Less: selling and administrative expenses	496,000*
Operating profit (EBIT)	\(255,000
Less: interest expenses	26,900
Earning before tax (EBT)	\)228,100
Less: taxes	83,300
Earning after taxes (EAT)	\(144,800

Selling and administrative expenses	$112,000
Depreciation expenses	73,000
Sales	489,000
Interest expenses	45,000
Cost of goods sold	156,000
Taxes	47,000

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What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?

Short Answer

Step by step solution

Cash budgets

Conditions that would helps in making the percent of sales forecast almost as accurate as pro forma financial statement and the cash budgets

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