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Chapter 6ARTERO CORPORATION

Short-Term Financial PlanningLeach & Melicher, 2012, pp. 194-202)

Estimating Additional Financing Needed to Support Short-Term Growth

The assigned problem for Chapter 6 considers the additional funds needed (AFN) for Artero Corporation, a traditional toy products retailer that recently started an Internet-based subsidiary to sell toys online. The Artero Corporation experiences a seasonal sales pattern since most of its annual sales are made during the end-of-year holiday season.

The company has reached its rapid growth life cycle stage since business operations have become an increasingly important source for growth funding. The company's management projects sales for 12 to 15 months in the future in order to determine if there is a gap between the financial capital needed and that funded by spontaneously generated funds and retained earnings. (Spontaneously generated funds are increases in accounts payables and accruals for wages and taxes that accompany sales increases.)

For this problem , the beginning balance sheet at September 30, 2011 is provided (see page 3 of this workbook). In addition, the sales forecast for the last three months of 2011 are provided (see page 3 of this workbook). The financial planning policies for the Artero company are listed on the following page (i.e., page 2 of this workbook).

Problem

The working papers for the assigned problem are found on pages 4 and 5 of this workbook. Using the Artero Corporation's forecasted sales for October, November, and December 2011, the balance sheet at September 30, 2011, you will project the following financial statements:

1. Pro Forma Income Statement for the Fourth Quarter 2011 (that is, October, November, and December)2. Pro Forma Balance Sheet for Fourth Quarter 20113. Cash Budget for the Fourth Quarter4. Statement of Cash Flow for the Fourth Quarter

Notes:

1. In the projected balance sheet, the additional funds needed (AFN) become a "plug" amount to make the total liabilities and equity equal to the firm's total assets. If the firm has sufficient funds during certain months to service the debt and support growth, the additional cash is shown on the balance sheet as "surplus cash."

2. The calculations for October 2011 are provided as examples of how you should prepare the statements for November and December 2011.

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Chapter 6 ProblemFinancial Planning: Short Term and Long Term for Artero Corporation

Artero Corporation Financial Planning Policies

1. A markup is added on goods the company purchases for manufacturers for resale. Also see #4 below.

2. All sales are made on credit terms of net 30 days and are collected the following month. No bad debts are anticipated. Therefore, the accounts receivable on the balance sheet at the end of September will be collected in October, the October sales will be collected in November, and so on. In addition, the ending balance in receivables equals the prior month's total sales.

3. Inventory on hand represents a minimum operating level (or safety stock), which the company intends to maintain; that is $500,000.

4. Cost of goods sold averages 80% of sales.

5. Inventory is purchased in the month of sale and paid for in cash.

6. Other expenses average 7% of sales.

7. Depreciation is $10,000 per month until June 2010.

8. Taxes are paid monthly and the effective income tax rate is 40% for planning purposes.

9. The annual interest rate on outstanding bank loans (notes payable) and long-term debt (including additional funds needed ) is 1.0%. Also see # 12 below.

10. There are no capital expenditures planned during the period, and no dividends will be paid during the period.

11. The company's desired end-of-month cash balance is $80,000.

12. The company plans to meet any cash shortages by increasing the firm's notes payable to the bank; that is, a separate line in the balance sheet reflects Additional Funds Needed (AFN). The interest rate on new loans will be 1.0%.

Problem Background

In early October 2011, Swen Artero, the company president, will meet with Jennifer Brown, a loan officer with First Banco Corporation, to review year-end financing requirements. After discussions with the company's marketing manager, Rolf Eriksson, and finance manager, Lisa Erdinger, projected sales for the fourth quarter of 2011, which are shown on the following page.

Artero's balance sheet as of the end of September 2011 is also shown on the following page.

The problem begins in the "Sales Forecast & Beg Bal Sheet" tab i.e., page 4 of this workbook.

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Artero CorporationSales Forecast

October 2011 1,000,000 November 2011 1,500,000 December 2011 3,000,000

Artero CorporationBalance Sheet at September 30, 2011

AssetsCash $ 50,000 Accounts receivable 700,000 Inventories 500,000 Net fixed assets 750,000

Total assets $ 2,000,000

Liabilities & EquityAccounts payable $ - Notes payable 800,000 Long-term debt 400,000

Total liabilities $ 1,200,000

Equity 800,000 Total liabilities & equity $ 2,000,000

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Chapter 6 Problem

Artero Corporation: Short-term Financial Planning

Fourth Quarter

A. Pro Forma Income Statement [Provided] Example Total

September October November December 4th Quarter % Rev

Sales $ 700,000 $ 1,000,000 $ 1,500,000 $ 3,000,000 $ 5,500,000 100.0%

Cost of Goods Sold (COGS) 560,000 800,000 1,200,000 2,400,000 4,400,000 80.0%

Gross Margin $ 140,000 $ 200,000 $ 300,000 $ 600,000 $ 1,100,000 20.0%

Operating Expenses

Depreciation 10,000 10,000 10,000 10,000 40,000 0.7%

Other Expense (7% of Sales) 49,000 70,000 105,000 210,000 385,000 7.0%

Total Operating Expenses 59,000 80,000 115,000 220,000 425,000 7.7%

Income from Oerations $ 81,000 $ 120,000 $ 185,000 $ 380,000 $ 675,000 12.3%

Interest Expense-a) 12,000 12,000 14,552 0.0%

Earnings Before Taxes (EBT) $ 69,000 $ 108,000 $ 170,448 0.0%

Taxes (40%) 27,600 43,200 68,179 0.0%

Net Income $ 41,400 $ 64,800 $ 102,269 0.0%(a- Interest of 1% is calculated on the prior month ending balance of notes payable, long-term debt, and AFN.

B. Pro Forma Balance SheetSeptember October November December

Assets

Cash $ 50,000 $ 80,000 $ 80,000 $ 80,000

Accounts Receivable 700,000 1,000,000 1,500,000 3,000,000

Inventories 500,000 500,000 500,000 500,000

Total Current Assets 1,250,000 1,580,000 2,080,000 3,580,000

Fixed Assets, Net-b) 750,000 740,000 1,060,000 1,530,000

Total Assets $ 2,000,000 $ 2,320,000 $ 3,140,000 $ 5,110,000

(b- Net Fixed Assets = Fixed Assets less Accumulated Depreciation

Liabilities & Equity

Accounts Payable $ - $ - $ - -

Notes Payable 800,000 800,000

Long-term Debt 400,000 400,000

Additional Funds Needed (AFN) -c) 0 255,200

Total Liabilities 1,200,000 1,455,200

Equity-d) 800,000 864,800

Total Liabilities & Equity $ 2,000,000 $ 2,320,000

(c- Remember that the Total Liabilities & Equity must equal the Total Assets.

You must complete the Cash Budget on page 5 to find the Cumulative Borrowing of AFN(d- Equity = Prior Month Equity Plus Current Month Net Income

Using Artero Corporation's sales forecast for October through December 2011, balance sheet at September 30, 2011, and financial planning policies, prepare the following financial statements.

A. Monthly pro forma income statement for October - December and for the quarter ended December 31.B. Monthly pro forma balance sheets at the end of October, November, and December 2011.

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Chapter 6 Problem

Artero Corporation: Short-term Financial Planning

A. Cash Budget [Provided]

October November December

Cash Receipts

Collection from Customers $ 700,000 $ 1,000,000 $ 1,500,000

Cash Disbursements

Purchases 800,000 800,000

Interest Payments 12,000 14,552

Payment of Taxes 43,200 68,179

Other Expenses 70,000 105,000

Total Disbursements 925,200 987,731

Net Monthly Cash Flow (225,200) 12,269

Beginning Cash 50,000 80,000

Additional Funds Needed (AFN) (175,200) 0

Cash Balance Required 80,000 80,000

Additional Funds Needed (AFN) 255,200 (12,269)

Cumulative Borrowing (on Balance Sheet) 255,200 255,200

B. Statement of Cash Flows [Provided]

October November December

Cash Flows From Operations

Net Income $ 64,800 $ 102,269

Adjustments to Net Income for Cash Flows

Depreciation Expense (add back noncash) 10,000 10,000 10,000

(Increase)/Decrease in Inventory 0 0 0

Increase/(Decrease) in Accounts Payable 0 0 0

(Increase)/Decrease in Accounts Receivables (300,000) (500,000) (1,500,000)

Total Adjustments (290,000) (490,000) 1,490,000

Net Cash Flow From Operations (225,200)

Net Cash Generated/(Used) by Investments 0

Net Cash Flows from Financing 0

Total Cash Flow (225,200)

Beginning Cash Balance 50,000 80,000 80,000

Required Ending Cash Balance 80,000 80,000 80,000

Additional Funds Needed (AFN) 255,200

Cumulative Funds Needed 255,200

Cash Surplus 0

Ending Cash Balance 80,000

Using Artero Corporation's sales forecast for October through December 2011, balance sheet at September 30, 2011, and financial planning policies, prepare the following financial statements.

A. Monthly Month Cash Budget for Fourth Quarter 2011.B. Monthly Statement of Cash Flow for Fourth Quarter 2011.