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$263,0001,700,000
Feb$186,0001,200,000
Mar$217,0001,400,000
April$310,0002,000,000
May$387,5002,500,000
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
inventory237,000
Total assets$587,800
Fixed assets
plant and equipment 1,000,000
Less: accumulated depreciation200,000
Total assets 800,000
______
1,387,800
Liabilities and stock holders equity
Accounts payable$93,600
notes payable0
Long-term debt,8 percent400,000
common stock504,200
retained earnings390,000
total liabilities and stockholders equity $1,387,800

Solution:-

Marsh Corporation
Forecasting with Seasonal Production
Dec. / Jan. / Feb. / Mar.
Projected Unit Sales / 1,500,000 / 1,700,000 / 1,200,000 / 1,400,000
+Desired Ending Inventory (2 months supply) / 2,900,000 / 2,600,000 / 3,400,000 / 4,500,000
–Beginning Inventory / 2,600,000 / 2,900,000 / 2,600,000 / 3,400,000
Units to be Produced / 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 month) / $93,600 / $84,000 / $120,000
Labor ($20 per thousand units) / $28,000 / $40,000 / $50,000
Overhead ($10 per thousand units) / $14,000 / $20,000 / $25,000
Selling & adm. expense (20% of sales) / $52,700 / $37,200 / $43,400
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
Nov. / Dec. / Jan. / Feb. / Mar.
Sales / $175,000 / $232,500 / $263,500 / $186,000 / $217,000
Collections (50% of Previous month) / 87,500 / $116,250 / 131,750 / 93,000
Collections (50% of 2 months earlier) / 87,500 / 116,250 / 131,750
Total Collections / $203,750 / $248,000 / $224,750

Monthly Cash Flow

January / February / March
Cash Receipts / $203,750 / $248,000 / $224,750
Cash Payments / 188,300 / 181,200 / 359,380
Net Cash Flow / 15,450 / 66,800 / (134,630)

Marsh Corporation

Cash Budget

January / February / March
Net Cash Flow / $15,450 / $66,800 / $(134,630)
Beginning Cash Balance / 30,000 / 25,000 / 25,000
Cumulative Cash Balance / $45,450 / $91,800 / ($109,630)
Loans and (Repayments) / -0- / -0- / 47,380
Cumulative Loans / -0- / -0- / 47,380
Marketable Securities / 20,450 / 66,800 / (87,250)
Cumulative Marketable Securities / 20,450 / 87,250 / -0-
Ending Cash Balance / $25,000 / $25,000 / $25,000

Marsh Corporation

Pro Forma Income Statement

Jan. / Feb. / Mar. / Total
Sales / $263,500 / $186,000 / $217,000 / $666,500
Cost of Goods Sold / 139,400 / 98,400 / 126,000 / 363,800
Gross Profit / 124,100 / 87,600 / 91,000 / 302,700
Selling and Admin. Expense / 52,700 / 37,200 / 43,400 / 133,300
Interest Expense / 2,667 / 2,667 / 2,666 / 8,000
Net Profit Before Tax / $ 68,733 / $ 47,733 / $ 44,934 / $161,400
Taxes / 27,493 / 19,093 / 17,974 / 64,560
Net Profit After Tax / $ 41,240 / $ 28,640 / $ 26,960 / $ 96,840
Less: Common Dividends / 48,420
Increase in Retained Earnings / $ 48,420

Marsh Corporation

Cost of Goods Sold

Unit Cost per thousand before January 1st / Unit cost per thousand after January 1st
Material.... / $52 / $60
Labor...... / 20 / 20
Overhead... / 10 / 10
$82 / $90

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 / Liabilities & Stockholders' Equity
Current Assets: / Current Liabilities:
Cash...... / $ 25,000 / Accounts Payable / $ 150,000
Accounts Receivable / 310,000 / Notes Payable / 47,380
Inventory...... / 405,000 / Long-Term Debt / 400,000
Plant & Equip:
Net Plan / 800,000 / Stockholders' Equity:
Common Stock / 504,200
Total Assets / $1,540,000 / Retained Earnings, Total Liabilities & Stockholders' Equity / 438,420
$1,540,000
Explanation of Changes in the Balance Sheet:
Cash = ending cash balance from cash budget in March
Accounts receivable
= all of March sales
plus 50% of Feb.
sales / $217,000
93,000
$310,000

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