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Hampton Machine Tool Company

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Hampton Machine Tool Company

9-280-103 Rev. 12/3/91

SUGGESTED ANSWERS

Rocky Higgins
April 2001

  1. Prepare a sources and uses of cash statement for Hampton for the period November 30 – August 31, 1979.

    Sources and Uses of Cash November 30, 1978 – August 31, 1979

SOURCES

Increase in bank debt

$1,000

Increase in retained earnings

883

Decrease in cash

961

Increase in customer advances

726

Increase in accounts payable

600

Decrease in accounts receivable

561

Increase in taxes payable

329

Decrease in net fixed assets

92

Decrease in prepaid expenses

20

TOTAL SOURCES OF CASH

$5,172

USES

Stock repurchase

$3,000

Increase in inventories

2,163

Decrease in accruals

9

TOTAL USES OF CASH

$5,172

  1. Reflecting on this sources and uses statement, why do you think this profitable company cannot repay its loan on time?  What developments between November and August have contributed to this situation?

    Judging from the sources and uses statement it appears that the sharp increase in inventories is responsible for the company’s inability to repay its loan.  This increase in inventories appears due to unexpected delay in receiving a critical part.

  1. Based on the information in the case, prepare a projected cash budget for the four months, September through December 1979.

    Projected Cash Budget September 1979 through December 1979.

Receipts

September

October

November

December

Collection of receivables*

$684

$1,323

$779

$1,604

Bank loan

350

Total cash receipts

$684

$1,673

$779

$1,604

Disbursements

Payment of accounts payable**

$948

$6009

$600

$600

Other operating outlays

400

400

400

400

Tax payments

181

181

Interest payments – bank loan

15

15

20

20

Principal payments – bank loan

1,350

Dividend payments

150

Total disbursements

$1,544

$1,365

$1,020

$2,701

Beginning cash balance

$1,559

$699

$1,007

$766

Net cash receipts (disbursements)

(860)

308

(241)

(1,097)

Ending cash balance

$699

$1,007

$766

$(331)

* Assumes a 30-day collection period.

** Assumes a 30-day payables period.

October collections of receivables equals $2,163 minus $840 advance payment.  Similarly, the November collections equals $1,505 minus $726 advance payment.

  1. Prepare a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979.  (Your income statement need not be monthly.  You can make one covering the entire four months.)

    Pro Forma Income Statement September – December 1979

Sales

$7,537

Projected sales Sept. – December

Cost of sales

$5,740

See below

Other expenses

117

See below

Profit before tax

$1,680

48% of profit before tax - $35 ITC

Taxes

771

Profit after taxes

$909

Dividends

150

Proposed Dec. dividend

Addition to retained earnings

$759

Notes:

Basic accounting relationship: beginning inventory + purchases + other outlays – cost of sales = ending inventory; solving for cost of sales,

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