2. Pro forma financial statements, by definition, are predictions of a company’s financial statements at a future point in time. So why is itimportant to analyze the historical performance of the company before constructing pro forma financial statements?
It is important to analyze the historical performance of a company tounderstand the relationship between past sales’ history and projection of future sales; and account for fixed costs such as plant and equipment.
4. Harlin Fencing Company’s sales,half of which are for cash, over the past three months were:
August September October
$70,000 $120,000 $80,000
a. Estimate Harlin’s cash receipts in October if thecompany’s collection period is 30 days.
b. Estimate Harlin’s cash receipts in October if the company’s collection period is 45 days.
c. What would be theOctober balance of Accounts Receivable for Harlin Fencing if the company’s collection period is:
30 days? 40K 45 days? 100K
8. This and the following two problems demonstratethat pro forma forecasts, cash budgets and cash flow forecasts all yield the same estimated need for external financing— provided you don’t make any mistakes. For problems 8, 9, and10, you may ignore the effect of added borrowing on interest expense.
The treasurer of Pepperton, Inc., a wholesale distributor of household appliances, wants to estimate hiscompany’s cash balances for the first three months of 2009. Using the information below, construct a monthly cash budget for Pepperton for January through March 2009. Does it appear fromyour results that the treasurer should be concerned about investing excess cash or looking for a bank loan?
The treasurer should be looking for a bank loan.