In: Accounting
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:
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.
1. Determine the cash that Franklin will have available to pay a dividend on December 31, 2018.
Answer : $ 27,257
Calculation
September sales collected in October | 12,700 |
October sales collected in November | 13,335 |
November sales collected in December | 14,002 |
Total accounts receivable collections | 40,037 |
October Sales =12700+(12700*5%) = 13,335
November sales collected in December = (13,335+(5%*13,335) = 14,002
September purchases paid for in October | 5,080 |
October purchases paid for in November | 5,334 |
November purchases paid for in December | 5,601 |
Total payments on account | 16,015 |
October purchases paid for in November = 13,335 * Cost of Sales = 13,335 * 40% = 5,334
November purchases paid for in December = 14,002 * Cost of Sales = 14,002 * 40% = 5,601
Cash balance, September 30, 2018 | 4,945 |
Add: Accounts receivable collection | 40,037 |
Add: Note receivable due -November 1 | 10,400 |
Add: Interest due - November 1 | 520 |
Less: Cash paid for purchase | (16,015) |
Less: Mortgage note payment | (3,600) |
Less: Operating expenses | (9,030) |
Cash balance, December 31, 2018 | 27,257 |
Interest due on November 1 = Note receivable * Interest rate on Note Receivable = 10,400 * 5% = 520
Mortgage note payments = Monthly Installments towards Note * 3 = 1,200 * 3 = 3,600
Operating expenses = Operating expenses paid in cash * 3 = 3,010 * 3 = 9,030
2. What can Franklin's management do to increase the cash available?
Answer : All of the Above
Explanation
Management can reduce inventory level, speed up the receivables collection, reduce operating expenses and also lengthen the average amount of time taken to pay inventory purchase to increase the cash available with the firm. They could use any of these actions to increase the cash balance.
3. Should management recommend that the board of directors declare a dividend? Explain.
Answer :Management should not recommend the normal quarterly dividend of $0.50 per share because Franklin has cash to barely be able to meet the dividend payment.
Explanation:
Common stock = 50,000 shares
Quartery dividends Per share = $0.50
Amount needed = 50,000 * 0.50 = 25,000
So, 25,000 needed to pay the quarterly dividends.
Franklin has cash to barely be able to meet the dividend payment. If they could increase the cash balance using any methods, they could pay dividends. Otherwise, they are not recommended to pay dividends.