lecture cash flow analysis 169

7/30/2019 Lecture Cash Flow Analysis 169

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7-1

Cash-Flow Analysis,

and Financial Planning



7-2

Statement o f Cash Flows

operating activities,

investing activities, and

financing activities.

Thi

s statement reports cash inflows and outflows based on the firm’s

A summary of a firm’s payments

during a period of time.



7-3


Cash Flow from Operating Activities

Shows impact of transactions notdefined as investing or financing

activities.

These cash flows are generally the casheffects of transactions that enter into thedetermination of net income.



7-4

Cash Flow From

Operat ing Act iv i t ies

Cash Inflows From sales of goods or services

From interest and dividend incomeCash Outflows

To pay suppliers for inventoryTo pay employees for services

To pay lenders (interest)To pay government for taxesTo pay other suppliers for other

operating expenses



7-5

Cash Flow From

Operat ing Act iv i t ies

It would seem more logical to classifyinterest and dividend income as an

“investing” inflow, while interest paidcertainly looks like a “financing”

outflow.

But, the U.S. Financial Accounting StandardsBoard -- by a slim 4 to 3 vote -- classified these

items as “operating” flows.



7-6


Cash Flow from Financing Activities

Shows impact of all cash transactionswith shareholders and the borrowing

and repaying transactions with lenders.

Cash Flow from Investing Activities

Shows impact of buying and sellingfixed assets and debt or equity

securities of other entities.



7-7

Cash Flow From

Invest ing Act iv i t ies

Cash Inflows From sale of fixed assets (property, plant,

equipment)

From sale of debt or equity securities (other than common equity) of other entities

Cash Outflows

To acquire fixed assets (property, plant,equipment)

To purchase debt or equity securities (other than common equity) of other entities



7-8

Cash Flow From

Financing Act iv i t ies

Cash Inflows From borrowing

From the sale of the firm’s own equitysecurities

Cash Outflows To repay amounts borrowed

To repurchase the firm’s own equitysecurities

To pay shareholders dividends



7-9

Ind irec t Method --



Net Income $ 91Depreciation 30Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)

Net cash provided (used) byoperating activities $ 56



7-10




Additions to Fixed Assets $(100)

Net cash provided (used) byinvesting activities $(100)



7-11




Increase, notes payable $ ( 5)Increase, long-term debt 77Dividends paid ( 38)

Net cash provided (used) byfinancing activities $ 34



7-12



Increase (decrease) in cash

and cash equivalents $ ( 10) Cash and cash equivalents, 2006 100 Cash and cash equivalents, 2007 $ 90

Supplemental cash flow disclosuresInterest paid $ 59Taxes paid 60



7-13

Direc t Method --



Cash received from customers

a

$2,227Cash paid to suppliers andemployeesb (2,051)

Interest paid ( 59)Taxes paidc ( 61)

Net cash provided (used) byoperating activities $ 56

a, b, c

See Worksheet on next slide for calculation



7-14

Worksheet for Preparing

Operat ing Act iv i t ies Sec t ion

Sales $2,211+(-) Decrease (increase) in AR 16

Cash received from customers $2,227

COGS - Depreciation + SGA $1,971

+(-) Increase (decrease) in inventory 80

Cash paid to suppliers and

employees $2,051Income taxes (federal / state) $ 60

+(-) Incr (Decr) in accum. tax prepay 1

Taxes paid $ 61

(a)

(b)

(c)



7-15

Direc t Method --



Additions to Fixed Assets $(100)

Net cash provided (used) byinvesting activities $(100)



7-16

Direc t Method --



Decrease, notes payable $ ( 5)Increase, long-term debt 77Dividends paid ( 38)

Net cash provided (used) byfinancing activities $ 34



7-17

Direc t Method --


Increase (decrease) in cashand cash equivalents $ ( 10)

Cash and cash equivalents, 2006 100

Cash and cash equivalents, 2007 $ 90 Supplemental cash flow disclosures

Net Income $ 91Depreciation 30

Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)Net cash provided (used) by

operating activities $ 56



7-18

Cash Flow Forecast ing

Determine the future cash needs of the firm Plan for the financing of these needs Exercise control over cash and liquidity of

the firm

A Cash Budget is a forecast of a firm’s future

cash flows arising from collections and

disbursements, usually on a monthly basis.

The financial manager is better able to:



7-19

The Sales Forecast

Sales representatives project sales

for the period in question (salesunder their control or management).

Sales projections are screened andconsolidated for product lines.

Product line sales projections areconsolidated into a single forecast.

In ternal Sales Forecast



7-20

The Sales Forecast

Economists project overall

economic and business trends thatwill affect the firm.

Expected market share is projectedfor current and new product lines.

Product line sales projections areconsolidated into a single forecast.

External Sales Forecast



Budgeting Example

Royal Company is preparing budgets for thequarter ending June 30.

Budgeted sales for the next five months are:

April 20,000 unitsMay 50,000 units

June 30,000 units

July 25,000 units

August 15,000 units.

The selling price is $10 per unit.



The Sales Budget

The individual months of April, May, and June aresummed to obtain the total projected sales in units

and dollars for the quarter ended June 30th



Expected Cash Collections

• All sales are on account.

• Royal’s collection pattern is:

70% collected in the month of sale,

25% collected in the month following sale,

5% uncollectible.

• The March 31 accounts receivable balance of

$30,000 will be collected in full.




From the Sales Budget for April.




From the Sales Budget for May.



Quick Check

What will be the total cash collections for thequarter?

a. $700,000

b. $220,000

c. $190,000

d. $905,000



What will be the total cash collections for thequarter?

a. $700,000

b. $220,000

c. $190,000

d. $905,000

Quick Check



The Production Budget

ProductionBudget

SalesBudget

andExpected

CashCollections

Production must be adequate to meet budgetedsales and provide for sufficient ending inventory.




• The management at Royal Company wantsending inventory to be equal to 20% of thefollowing month’s budgeted sales in units.

• On March 31, 4,000 units were on hand.

Let’s prepare the production budget.




March 31ending inventory

Budgeted May sales 50,000

Desired ending inventory % 20%

Desired ending inventory 10,000



Quick Check

What is the required production for May?

a. 56,000 units

b. 46,000 units

c. 62,000 units

d. 52,000 units



What is the required production for May?

a. 56,000 units

b. 46,000 units

c. 62,000 unitsd. 52,000 units

Quick Check




Assumed ending inventory.

Th Di M i l B d



The Direct Materials Budget

• At Royal Company, five pounds of materialare required per unit of product.

• Management wants materials on hand at

the end of each month equal to 10% of thefollowing month’s production.

• On March 31, 13,000 pounds of material

are on hand. Material cost is $0.40 per pound.

Let’s prepare the direct materials budget.

Th Di t M t i l B d t




From production budget





Calculate the materials toby purchased in May.

March 31 inventory

10% of following monthsproduction needs.

Q i k Ch k



Quick Check

How much materials should be purchased in May?

a. 221,500 pounds

b. 240,000 pounds

c. 230,000 pounds

d. 211,500 pounds

Q i k Ch k



How much materials should be purchased in May?

a. 221,500 pounds

b. 240,000 pounds

c. 230,000 pounds

d. 211,500 pounds

Quick Check





Assumed ending inventory

E t d C h Di b t f M t i l



Expected Cash Disbursement for Materials

• Royal pays $0.40 per pound for its materials.• One-half of a month’s purchases is paid for in

the month of purchase; the other half is paid

in the following month.• The March 31 accounts payable balance is

$12,000.

Let’s calculate expected cash disbursements.



E t d C h Di b t f M t i l




140,000 lbs. × $.40/lb. = $56,000

Compute the expected cash

disbursements for materialsfor the quarter.

Quick Check



Quick Check

What are the total cash disbursements for thequarter?

a. $185,000

b. $ 68,000c. $ 56,000

d. $201,400

Quick Check



What are the total cash disbursements for thequarter?

a. $185,000

b. $ 68,000c. $ 56,000

d. $201,400

Quick Check





The Direct Labor Budget




• At Royal, each unit of product requires 0.05 hours (3minutes) of direct labor.

• The Company has a “no layoff” policy so all employeeswill be paid for 40 hours of work each week.

• In exchange for the “no layoff” policy, workers agree toa wage rate of $10 per hour regardless of the hoursworked (No overtime pay).

•

For the next three months, the direct labor workforce willbe paid for a minimum of 1,500 hours per month.

Let’s prepare the direct labor budget.





From production budget





Greater of labor hours requiredor labor hours guaranteed.





Quick Check



Quick Check

What would be the total direct labor cost for thequarter if the company follows its no lay-off policy,but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month?

a. $79,500

b. $64,500

c. $61,000

d. $57,000

Quick Check



What would be the total direct labor cost for thequarter if the company follows its no lay-off policy,but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month?

a. $79,500

b. $64,500

c. $61,000

d. $57,000

Quick Check

April May June Quarter

Labor hours required 1,300 2,300 1,450 Regular hours paid 1,500 1,500 1,500 4,500

Overtime hours paid - 800 - 800

Total regular hours 4,500 $10 45,000$

Total overtime hours 800 $15 12,000$Total pay 57,000$

Manufacturing Overhead Budget




• At Royal manufacturing overhead is applied to unitsof product on the basis of direct labor hours.

• The variable manufacturing overhead rate is $20 per direct labor hour.

• Fixed manufacturing overhead is $50,000 per monthand includes $20,000 of noncash costs (primarilydepreciation of plant assets).

Let’s prepare the manufacturing overhead budget.





Direct Labor Budget





Total mfg. OH for quarter $251,000Total labor hours required 5,050

= $49.70 per hour*

*rounded





Depreciation is a noncash charge.

Ending Finished Goods Inventory Budget



Production costs per unit Quantity Cost TotalDirect materials 5.00 lbs. 0.40$ 2.00$Direct labor Manufacturing overhead

Budgeted finished goods inventoryEnding inventory in unitsUnit product costEnding finished goods inventory


Direct materialsbudget and information




Production costs per unit Quantity Cost TotalDirect materials 5.00 lbs. 0.40$ 2.00$Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead

Budgeted finished goods inventoryEnding inventory in unitsUnit product costEnding finished goods inventory


Direct labor budget




Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. 0.40$ 2.00$

Direct labor 0.05 hrs. 10.00$ 0.50

Manufacturing overhead 0.05 hrs. 49.70$ 2.49

4.99$Budgeted finished goods inventory

Ending inventory in units

Unit product cost 4.99$

Ending finished goods inventory ?


Total mfg. OH for quarter $251,000Total labor hours required 5,050

= $49.70 per hour*




Production costs per unit Quantity Cost TotalDirect materials 5.00 lbs. 0.40$ 2.00$Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49

4.99$Budgeted finished goods inventory

Ending inventory in units 5,000 Unit product cost 4.99$Ending finished goods inventory 24,950$


Production Budget

Selling and Administrative Expense Budget




• At Royal, the selling and administrative expenses budget isdivided into variable and fixed components.

• The variable selling and administrative expenses are $0.50per unit sold.

•

Fixed selling and administrative expenses are $70,000 per month.

• The fixed selling and administrative expenses include$10,000 in costs – primarily depreciation – that are not cashoutflows of the current month.

Let’s prepare the company’s selling and administrativeexpense budget.





Calculate the selling and administrativecash expenses for the quarter.

Quick Check



Quick Check

What are the total cash disbursements for sellingand administrative expenses for the quarter?

a. $180,000

b. $230,000

c. $110,000

d. $ 70,000

Quick Check



What are the total cash disbursements for sellingand administrative expenses for the quarter?

a. $180,000

b. $230,000

c. $110,000

d. $ 70,000

Quick Check





Format of the Cash Budget



Format of the Cash Budget

The cash budget is divided into four sections:

1. Cash receipts listing all cash inflows excludingborrowing

2. Cash disbursements listing all paymentsexcluding repayments of principal and interest

3. Cash excess or deficiency

4. The financing section listing all borrowings,repayments and interest

The Cash Budget



The Cash Budget

Royal:Maintains a 16% open line of credit for $75,000

Maintains a minimum cash balance of $30,000

Borrows on the first day of the month and repaysloans on the last day of the month

Pays a cash dividend of $49,000 in April

Purchases $143,700 of equipment in May and$48,300 in June paid in cash

Has an April 1 cash balance of $40,000

The Cash Budget



The Cash Budget

Schedule of ExpectedCash Collections

The Cash Budget



The Cash Budget

Direct Labor Budget

ManufacturingOverhead Budget

Selling and AdministrativeExpense Budget

Schedule of ExpectedCash Disbursements

The Cash Budget



g

Because Royal maintainsa cash balance of $30,000,

the company must borrow$50,000 on it line-of-credit.

The Cash Budget



g

Ending cash balance for Aprilis the beginning May balance.

The Cash Budget



g

Quick Check



What is the excess (deficiency) of cash availableover disbursements for June?

a. $ 85,000

b. $(10,000)c. $ 75,000

d. $ 95,000

Quick Check



What is the excess (deficiency) of cash availableover disbursements for June?

a. $ 85,000

b. $(10,000)c. $ 75,000

d. $ 95,000

The Cash Budget



g

$50,000 × 16% × 3/12 = $2,000Borrowings on April 1 and

repayment on June 30.

The Budgeted Income Statement



g

CashBudget

BudgetedIncome

Statement

After we complete the cash budget,we can prepare the budgeted income

statement for Royal.

The Budgeted Income Statement



g

Royal Company

Budgeted Income Statement

For the Three Months Ended June 30

Sales (100,000 units @ $10) 1,000,000$

Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000

Selling and administrative expenses 260,000

Operating income 241,000

Interest expense 2,000

Net income 239,000$

Sales Budget

Ending FinishedGoods Inventory

Selling and AdministrativeExpense Budget

Cash Budget

The Budgeted Balance Sheet



g

Royal reported the following accountbalances prior to preparing its budgeted

financial statements:

Land - $50,000Common stock - $200,000

Retained earnings - $146,150

Equipment - $175,000

Royal Company

Budgeted Balance Sheet

25% of June




June 30

Current assets

Cash 43,000$Accounts receivable 75,000

Raw materials inventory 4,600

Finished goods inventory 24,950

Total current assets 147,550

Property and equipmentLand 50,000

Equipment 367,000

Total property and equipment 417,000

Total assets 564,550$

Accounts payable 28,400$

Common stock 200,000

Retained earnings 336,150

Total liabilities and equities 564,550$

11,500 lbs.at $0.40/lb.

5,000 units

at $4.99 each

50% of Junepurchasesof $56,800

25% of Junesales of $300,000

Royal Company





June 30

Current assets

Cash 43,000$Accounts receivable 75,000

Raw materials inventory 4,600

Finished goods inventory 24,950

Total current assets 147,550

Property and equipmentLand 50,000

Equipment 367,000

Total property and equipment 417,000

Total assets 564,550$

Accounts payable 28,400$

Common stock 200,000

Retained earnings 336,150

Beginning balance 146,150$

Add: net income 239,000

Deduct: dividends (49,000)

Ending balance 336,150$

lecture cash flow analysis 169

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