Question

Cash Flow

Franklin Co., a specialty retailer, has a history of paying quarterly dividends of $0.50 per share. Management is trying to determine whether the company will have adequate cash on December 31, 2018, to pay a dividend if one is declared by the board of directors. The following additional information is available:

• All sales are on account, and accounts receivable are collected one month after the sale. Sales volume has been increasing 5% each month.
• All purchases of merchandise are on account, and accounts payable are paid one month after the purchase. Cost of sales is 40% of the sales price. Inventory levels are maintained at $74,400.
• Operating expenses in addition to the mortgage are paid in cash. They amount to $3,010 per month and are paid as they are incurred.

Franklin Co. Balance Sheet September 30, 2018
Cash	$4,945		Accounts payable	$5,080
Accounts receivable	12,700		Mortgage note**	150,000
Inventory	74,400		Common stock - $1 par	50,000
Note receivable*	10,400		Retained earnings	66,365
Building/Land	169,000		Total liabilities and
Total assets	$271,445		stockholders' equity	$271,445

*Note receivable represents a one-year, 5% interest-bearing note due November 1, 2018.

**Mortgage note is a 30-year, 7% note due in monthly installments of $1,200.

Required:

1. Determine the cash that Franklin will have available to pay a dividend on December 31, 2018. Round intermediate calculations and final answer amount to the nearest dollar.

2. What can Franklin's management do to increase the cash available?

3. Should management recommend that the board of directors declare a dividend? Explain.

Answer 1

Particulars Oct. Nov. Dec

1. Opening cash balance. 4945 8398. 22589

2. amount recived from. 12700. 13335. 14002

Debtors

3.interest on note. 43.

Reciables

4. note Reciables. 10400

5.paymentto vendors. -5080. -5334. -5601

6. Mortgage note

Instalment. -1200. -1200. -1200

7. Operating expenses. -3010. -3010. -3010

8. Closing cash. 8398. 22589. 26780

Divident declared on every quarter. 25000

​​​​ 50000X0.5

Trader has sufficient cash to declare divident

Calculation of sales for Oct and Nov

Oct. Nov

Given that sales will increase

5% every month 13335. 14002

(12700+12700×5/100). (13335+13335×5/100)

Note:- Oct and Nov sales are received in next respective years

Calculation of cost of Sales for Oct and Nov

Oct. Nov

Given that cost of sales 5334. 5601

Are 40% of sales. 13335X40%. 14002X40%

Note:- Franklin co is a retail vendor therefore cost of sales is equal to purchases because they don't incure any other direct expenses related to goods

2. Franklin management can increase cash only by increasing sales alredy they selling goods at higher price than they purchased

3. Yes company has sufficient cash to pay divident receipts from debtors for the month of December us sufficient to meet payment in January

Note:- I assumed mortgage instalment include intrest for respective month and note Reciables interest 5% is for annual.