Question

1. Selected financial data of K Technologies, Inc., at December 31, Year 1, are shown below: Cash......................................... $42,000 Accounts payable ........$ 78,000 Accounts receivable.................. 90,000 Notes payable.............. 21,000 Inventory................................... 39,000 Accrued taxes.............. 10,800 Fixed assets.............................. 120,000 Capital stock............... 120,000 Accumulated depreciation........ 25,800 Retained earnings....... 35,400 The following additional information is available for the year ended December 31, Year 1: Sales ...................................................................$450,000 Depreciation...... $15,000 Cost of goods sold (excluding depreciation) ........ 312,000 Net income ........ 12,000 Purchases............................................................ 210,000  For Year 2, K Technologies anticipates a 7% sales growth.  To counterbalance this lower than expected growth rate, the company implements costcutting strategies to reduce cost of goods sold by 4% from the Year 1 level.  All other expenses are expected to increase by 6%.  Expected net income for Year 2 is $20,000.  Ending Year 2 inventory is estimated at $90,000 and there is no expected balance in accrued taxes. The company requires $175,000 to buy new equipment in Year 2.  The minimum desired cash balance is $40,000.  The company offers a discount of 3% of sales if payment is received in 10 days. It is expected that 12% of sales take advantage of this discount, while the remaining 90% are collected (on average) in 60 days. Required: 1. Prepare a what-if analysis of cash needs (cash forecast) for Year 2. Will K Technologies need to borrow money? 2. Was changing the credit policy beneficial for the firm? Explain.

Answer 1

Year 1 financial information
	$	$
Cash	42,000
Accounts Payable		78,000
Accounts Receivable	90,000
Notes Payable		21,000
Inventory	39,000
Accrued Taxes		10,800
Fixed Assets	1,20,000
Capital Stock		1,20,000
Accumulated Depreciation		25,800
Retained Earning		35,400
Sales		4,50,000
Depreciation	15,000
Cost of goods sold	3,12,000
Operating Expenses	1,11,000
Other item (Balancing)	12,000
Total	7,41,000	7,41,000
Net Income		12,000
Purchases	2,10,000
Notes 1) Gross profit is (450000-312000)= $ 1,38,000
Notes 2) Net Income is $ 12000
Notes 3) So operating expenses are (138000-15000-12000) = $ 1,11,000
2nd Year expectation		$
Sales (450000*107%)		4,81,500
Cost of goods sold ((312000*96%)		-2,99,520
Other expenses-Operating Expenses (111000*106%)	-1,17,660
Discount allowed (481500*12%*3%)		-1,733
Depreciation ( Provided as no meet target income $ 20K)	-42,587
Net Income		20,000
Cash Budget for Year 2	$	$
Begnning Balance		42,000
Add: Sales Revenue Receipts		4,99,147
Cash received from customer taking discount
(481500*12%)*97%	56,047
Cash received from other customer
(collected on average in 60 days)	3,53,100
((481500*88%)/360*300)
opening accounts receivable received	90,000
Less:
Outstanding payable Paid		-78,000
Purchase and direct cost		-3,50,520
Operating Expenses		-1,17,660
Tax Paid (earlier period)		-10,800
Equipment cost		-1,75,000
		-1,90,833
Less: Required minimum balance		-40,000
Borrowing required		-2,30,833
So Required borrowing for company shall be		2,30,833
Changing the policy definitely increase liquidity.
Notes 4) Its is assumed 360 days in a year.
Notes 5) Computing Purchase & direct expenses for 2nd year
	$
Opening Stock	-39,000
Closing inventory	90,000
Cost of Goods sold	2,99,520
Purchase	3,50,520
Assumed payment for purchase done at the time of purchased
Notes 6) It is assumed notes payable not yet paid