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ARTERO CORPORATION
Short-Term Financial Planning
Leach & Melicher, 2012, pp. 194-202)
Estimating Additional Financing Needed to Support Short-Term Growth
The assigned problem for Chapter 6 considers the additional funds needed (AFN) for Artero
Corporation, a traditional toy products retailer that recently started an Internet-based
subsidiary to sell toys online. The Artero Corporation experiences a seasonal sales pattern
since most of its annual sales are made during the end-of-year holiday season.
The company has reached its rapid growth life cycle stage since business operations have
become an increasingly important source for growth funding. The company's management
projects sales for 12 to 15 months in the future in order to determine if there is a gap
between the financial capital needed and that funded by spontaneously generated funds
and retained earnings. (Spontaneously generated funds are increases in accounts
payables and accruals for wages and taxes that accompany sales increases.)
For this problem , the beginning balance sheet at September 30, 2011 is provided (see
page 3 of this workbook). In addition, the sales forecast for the last three months of 2011
are provided (see page 3 of this workbook). The financial planning policies for the Artero
company are listed on the following page (i.e., page 2 of this workbook).
Problem
The working papers for the assigned problem are found on pages 4 and 5 of this workbook.
Using the Artero Corporation's forecasted sales for October, November, and December
2011, the balance sheet at September 30, 2011, you will project the following financial
statements:
1. Pro Forma Income Statement for the Fourth Quarter 2011 (that is, October, November,
and December)
2. Pro Forma Balance Sheet for Fourth Quarter 2011
3. Cash Budget for the Fourth Quarter
4. Statement of Cash Flow for the Fourth Quarter
Notes:
1. In the projected balance sheet, the additional funds needed (AFN) become a "plug"
amount to make the total liabilities and equity equal to the firm's total assets. If the firm
has sufficient funds during certain months to service the debt and support growth, the
additional cash is shown on the balance sheet as "surplus cash."
2. The calculations for October 2011 are provided as examples of how you should prepare
the statements for November and December 2011.
Page 1
Chapter 6 Problem
Financial Planning: Short Term and Long Term for Artero Corporation
Artero Corporation Financial Planning Policies
1. A markup is added on goods the company purchases for manufacturers for resale. Also
see #4 below.
2. All sales are made on credit terms of net 30 days and are collected the following
month. No bad debts are anticipated. Therefore, the accounts receivable on the balance
sheet at the end of September will be collected in October, the October sales will be
collected in November, and so on. In addition, the ending balance in receivables equals
the prior month's total sales.
3. Inventory on hand represents a minimum operating level (or safety stock), which the
company intends to maintain; that is $500,000.
4. Cost of goods sold averages 80% of sales.
5. Inventory is purchased in the month of sale and paid for in cash.
6. Other expenses average 7% of sales.
7. Depreciation is $10,000 per month until June 2010.
8. Taxes are paid monthly and the effective income tax rate is 40% for planning purposes.
9. The annual interest rate on outstanding bank loans (notes payable) and long-term debt
(including additional funds needed ) is 1.0%. Also see # 12 below.
10. There are no capital expenditures planned during the period, and no dividends will be
paid during the period.
11. The company's desired end-of-month cash balance is $80,000.
12. The company plans to meet any cash shortages by increasing the firm's notes
payable to the bank; that is, a separate line in the balance sheet reflects Additional Funds
Needed (AFN). The interest rate on new loans will be 1.0%.
Problem Background
In early October 2011, Swen Artero, the company president, will meet with Jennifer
Brown, a loan officer with First Banco Corporation, to review year-end financing
requirements. After discussions with the company's marketing manager, Rolf Eriksson,
and finance manager, Lisa Erdinger, projected sales for the fourth quarter of 2011, which
are shown on the following page.
Artero's balance sheet as of the end of September 2011 is also shown on the following
page.
The problem begins in the "Sales Forecast & Beg Bal Sheet" tab i.e., page 4 of this
workbook.
Page 2
Artero Corporation
Sales Forecast
October 2011
November 2011
December 2011
1,000,000
1,500,000
3,000,000
Artero Corporation
Balance Sheet at September 30, 2011
Assets
Cash
Accounts receivable
Inventories
Net fixed assets
Total assets
50,000
700,000
500,000
750,000
$ 2,000,000
Page 3
800,000
400,000
$ 1,200,000
800,000
$ 2,000,000
Chapter 6 Problem
Artero Corporation: Short-term Financial Planning
Using Artero Corporation's sales forecast for October through December 2011, balance sheet at September 30, 2011, and
financial planning policies, prepare the following financial statements.
A. Monthly pro forma income statement for October - December and for the quarter ended December 31.
B. Monthly pro forma balance sheets at the end of October, November, and December 2011.
Fourth Quarter
A. Pro Forma Income Statement
Sales
Cost of Goods Sold (COGS)
Gross Margin
[Provided]
September
$
700,000
560,000
140,000
Example
October
November
December
Total
4th Quarter
% Rev
1,000,000 $
1,500,000 $
3,000,000 $
5,500,000
100.0%
800,000
200,000 $
1,200,000
300,000 $
2,400,000
600,000 $
4,400,000
1,100,000
80.0%
20.0%
Operating Expenses
Depreciation
10,000
10,000
10,000
10,000
40,000
0.7%
49,000
59,000
70,000
80,000
105,000
115,000
210,000
220,000
385,000
425,000
7.0%
7.7%
380,000 $
675,000
12.3%
0.0%
81,000
12,000
120,000 $
12,000
185,000 $
14,552
69,000
27,600
108,000 $
43,200
170,448
68,179
0.0%
0.0%
Net Income
$
41,400
$
64,800 $
102,269
(a- Interest of 1% is calculated on the prior month ending balance of notes payable, long-term debt, and AFN.
0.0%
October
November
December
Assets
Cash
$
50,000
Accounts Receivable
700,000
Inventories
500,000
Total Current Assets
1,250,000
Fixed Assets, Net-b)
750,000
Total Assets
$
2,000,000
(b- Net Fixed Assets = Fixed Assets less Accumulated Depreciation
Liabilities & Equity
Accounts Payable
Notes Payable
Long-term Debt
Additional Funds Needed (AFN) -c)
Total Liabilities
Equity-d)
Total Liabilities & Equity
(c(d-
800,000
400,000
0
1,200,000
800,000
2,000,000
80,000 $
1,000,000
500,000
1,580,000
740,000
2,320,000 $
800,000
400,000
255,200
1,455,200
864,800
2,320,000
Remember that the Total Liabilities & Equity must equal the Total Assets.
You must complete the Cash Budget on page 5 to find the Cumulative Borrowing of AFN
Equity = Prior Month Equity Plus Current Month Net Income
Page 4
80,000 $
1,500,000
500,000
2,080,000
1,060,000
3,140,000 $
80,000
3,000,000
500,000
3,580,000
1,530,000
5,110,000
Chapter 6 Problem
Artero Corporation: Short-term Financial Planning
Using Artero Corporation's sales forecast for October through December 2011, balance sheet at September
30, 2011, and financial planning policies, prepare the following financial statements.
A. Monthly Month Cash Budget for Fourth Quarter 2011.
B. Monthly Statement of Cash Flow for Fourth Quarter 2011.
A. Cash Budget
[Provided]
October
November
December
Cash Receipts
Collection from Customers
700,000 $
1,000,000 $
1,500,000
Cash Disbursements
Purchases
Interest Payments
800,000
12,000
Payment of Taxes
43,200
68,179
70,000
925,200
105,000
987,731
(225,200)
12,269
50,000
80,000
(175,200)
80,000
80,000
255,200
255,200
(12,269)
255,200
Other Expenses
Total Disbursements
Net Monthly Cash Flow
Beginning Cash
Additional Funds Needed (AFN)
Cash Balance Required
Additional Funds Needed (AFN)
Cumulative Borrowing (on Balance Sheet)
B. Statement of Cash Flows
800,000
14,552
[Provided]
October
(Increase)/Decrease in Inventory
Increase/(Decrease) in Accounts Payable
(Increase)/Decrease in Accounts Receivables
Total Adjustments
Net Cash Flow From Operations
November
64,800 $
December
102,269
10,000
10,000
10,000
0
0
(300,000)
(290,000)
0
0
(500,000)
(490,000)
0
0
(1,500,000)
1,490,000
80,000
80,000
80,000
80,000
(225,200)
(225,200)
50,000
80,000
255,200
255,200
0
80,000
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