Question:-

The Marsh company makes standard size 2 inch fasteners,which it sells for $155 per thousand. Mr.
Marsh is the majority owner and manages the inventory and finances of the company. He Estimates
sales for the following months to be. Month
Fasteners Jan
$263,000
1,700,000
Feb
$186,000
1,200,000 Mar
$217,000
1,400,000 April
$310,000
2,000,000
May
$387,500
2,500,000 Last year Marsh corp sales were $175,000 in November and $232,500
in December.(1,500,000 fasteners. Mr. Marsh is preparing for a meeting with his banker to arrange the
financing for the first quarter. Based on his sales focast and the following information he provided
please prepare a monthly cash budget, monthly and quaterly pro forma income statements, a pro
forma quarterly balance sheet and all the necessary supporting schedules for the first quater. Past
histroy shows that the Marsh corp collects 50 % of it accounts recievable in the normal 30 day
period( the month after the sale)and the other 50 % in 60 days. It pays for materials 30 days after
receipt. In general mr. Marsh likes to keep a 2 months supply in inventory in anticipation of sales.
Inventory at the begining of December was 2,600,000 units. The major cost of the production is the
purchase of raw materials in the form of stell rods,which are cut threaded and finished.last year raw
material costs were $ 52.00 per 1,000 fasteners but mr. Marsh has just been notifed that material cost
have risen,effective January1,to $60.00 per 1,000 fasteners. The March corp uses fifo inventory
accounting. Labor costs are relitivly constant at $20.00 per thousand fasteners, since workers are paid
on a piece work basis. Over head is allocated at $10.00 per thousand units and selling and
administrative expense is 20% os sales. Labor expenses and overhead are direct cash outflows paid in
the month incurred,while intrest and taxes are paid quaterly. The corp usually maintains a min cash
budget of 25,000 and it puts its excess cash into marketable securities The average tax rate is 40%
and mr, marsh usaullt pays out 50% of the net income in dividens and to stock holders. Marcketable
securities are sold before funds are borrowed when when a cash shortage is faced. Ignore the intrest
on any short-term borrowings. Intreat on the long-term debt is paid in March as are the taxes and
dividens. As of year-end, the marsh Corp balance sheet was as followed. December 31,200X Current
Assets Cash $30,000 Accounts receivable 320,000 inventory 237,000 Total assets
$587,800 Fixed
assets plant and equipment 1,000,000 Less: accumulated depreciation 200,000 Total
assets
800,000
________
1,387,800 Liabilities and stock
holders equity Accounts payable
$93,600 notes payable
0 Long-term debt,8 percent
400,000
common stock
504,200 retained earnings
390,000 total liabilities and stockholders equity
$1,387,800

Solution:-

Marsh Corporation
Forecasting with Seasonal Production

Projected
Unit Sales

Dec.

Jan.

Feb.

Mar.

1,500,000

1,700,000

1,200,000

1,400,000

+Desired
Ending
Inventory (2
months
supply)
Beginning
Inventory
Units to be
Produced

PAGE

2,900,000

2,600,000

3,400,000

4,500,000

2,600,000

2,900,000

2,600,000

3,400,000

1,800,000

1,400,000

2,000,000

2,500,000

Monthly Cash Payments

Units to be
produced
Materials
(from
previous
month)
Labor ($20
per
thousand
units)
Overhead
($10 per
thousand
units)
Selling &
adm.
expense
(20% of
sales)
Interest
Taxes (40%
tax rate)
Dividends
Total
Payments

Dec.

Jan.

Feb.

Mar.

1,800,000

1,400,000

2,000,000

2,500,000

$93,600

$84,000

$120,000

$28,000

$40,000

$50,000

$14,000

$20,000

$25,000

$52,700

$37,200

$43,400

$8,000

$64,560*

$48,420*
$188,300

$181,200

$359,380

*See the pro forma income statement, which follows this material later
on, for the development of these values.

Marsh Corporation
Monthly Cash Receipts

Sales
Collection
s (50% of
Previous
month)

Nov.
$175,000

Dec.
$232,500

Jan.
$263,500

Feb.
$186,000

Mar.
$217,000

87,500

$116,250

131,750

93,000

87,500

116,250

131,750

$203,750

$248,000

$224,750

Collection
s (50% of
2 months
earlier)
Total
Collection
s

Monthly Cash Flow

Cash Receipts
Cash Payments
Net Cash Flow
PAGE

January
$203,750
188,300
15,450

February
$248,000
181,200
66,800

March
$224,750
359,380
(134,630)

Marsh Corporation
Cash Budget

Net Cash Flow

Beginning Cash
Balance
Cumulative
Cash Balance
Loans and
(Repayments)
Cumulative
Loans
Marketable
Securities
Cumulative
Marketable
Securities
Ending Cash
Balance

January
$15,450
30,000

February
$66,800
25,000

March
$(134,630)
25,000

$45,450

$91,800

($109,630)

-0-

-0-

47,380

-0-

-0-

47,380

20,450

66,800

(87,250)

20,450

87,250

-0-

$25,000

$25,000

$25,000

Marsh Corporation
Pro Forma Income Statement

Sales
Cost of
Goods Sold
Gross Profit
Selling and
Admin.
Expense
Interest
Expense
Net Profit
Before Tax
Taxes
Net Profit
After Tax
Less:
Common
Dividends
Increase in
Retained
Earnings

Jan.

Feb.

Mar.

Total

$263,500

$186,000

$217,000

$666,500

98,400

126,000

363,800

139,400
124,100

87,600

91,000

302,700

52,700

37,200

43,400

133,300

2,667

$ 68,733

27,493
$ 41,240

2,667

2,666

8,000

$ 47,733
19,093

$ 44,934
17,974

$161,400
64,560

$ 28,640

$ 26,960

$ 96,840
48,420

$ 48,420

Marsh Corporation
Cost of Goods Sold
Unit Cost per
PAGE

Unit cost per thousand after January 1st

thousand before
January 1st
Material

$52

$60

Labor

20

20

Overhead

10

10

$82

$90

Ending inventory as of December 31 was 2,900,000, therefore, sales for January and February had a cost of goods sold per
thousand units of $82, and March sales reflect the increased cost of $90 per thousand units using FIFO inventory methods.

Pro Forma Balance Sheet (March)

Assets

Liabilities & Stockholders'

Equity

Current Assets:

Current Liabilities:

Cash

Accounts Receivable
Inventory

25,000

Accounts Payable

$ 150,000

310,000

Notes Payable

47,380

405,000

Long-Term Debt

400,000

Plant & Equip: Net Plan

Stockholders' Equity:

Common Stock
800,000
Total Assets

$1,540,000

504,200
Retained Earnings, Total
Liabilities & Stockholders'
Equity

438,420

$1,540,000

Explanation of Changes in the Balance Sheet:

Cash = ending cash balance from cash budget in March
Accounts receivable

$217,000

= all of March sales

plus 50% of Feb.

sales
93,000
$310,000

Inventory = ending inventory in March of 4,500,000 units at $90 per thousand

Plant and equipment did not change since we did not include depreciation.

RE = Old RE + (NI dividends)

= $390,000 + ($96,840 $48,240) = $438,420

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