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Chapter 6

ARTERO CORPORATION
Short-Term Financial Planning
Leach & 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 2011
3. Cash Budget for the Fourth Quarter
4. 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 Problem
Financial 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 Corporation
Sales Forecast
October 2011
November 2011
December 2011

1,000,000
1,500,000
3,000,000

Artero Corporation
Balance Sheet at September 30, 2011
Assets
Cash
Accounts receivable
Inventories
Net fixed assets
Total assets

50,000
700,000
500,000
750,000
$ 2,000,000

Liabilities & Equity


Accounts payable
Notes payable
Long-term debt
Total liabilities
Equity
Total liabilities & equity

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800,000
400,000
$ 1,200,000
800,000
$ 2,000,000

Chapter 6 Problem
Artero Corporation: Short-term Financial Planning

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.

Fourth Quarter
A. Pro Forma Income Statement
Sales
Cost of Goods Sold (COGS)
Gross Margin

[Provided]
September
$

700,000

560,000
140,000

Example
October

November

December

Total
4th Quarter

% Rev

1,000,000 $

1,500,000 $

3,000,000 $

5,500,000

100.0%

800,000
200,000 $

1,200,000
300,000 $

2,400,000
600,000 $

4,400,000
1,100,000

80.0%
20.0%

Operating Expenses
Depreciation

10,000

10,000

10,000

10,000

40,000

0.7%

Other Expense (7% of Sales)


Total Operating Expenses

49,000
59,000

70,000
80,000

105,000
115,000

210,000
220,000

385,000
425,000

7.0%
7.7%

380,000 $

675,000

12.3%
0.0%

Income from Oerations


Interest Expense-a)

81,000
12,000

120,000 $
12,000

185,000 $
14,552

Earnings Before Taxes (EBT)


Taxes (40%)

69,000
27,600

108,000 $
43,200

170,448
68,179

0.0%
0.0%

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

0.0%

B. Pro Forma Balance Sheet


September

October

November

December

Assets
Cash
$
50,000
Accounts Receivable
700,000
Inventories
500,000
Total Current Assets
1,250,000
Fixed Assets, Net-b)
750,000
Total Assets
$
2,000,000
(b- Net Fixed Assets = Fixed Assets less Accumulated Depreciation
Liabilities & Equity
Accounts Payable
Notes Payable
Long-term Debt
Additional Funds Needed (AFN) -c)
Total Liabilities
Equity-d)
Total Liabilities & Equity

(c(d-

800,000
400,000
0
1,200,000
800,000
2,000,000

80,000 $
1,000,000
500,000
1,580,000
740,000
2,320,000 $

800,000
400,000
255,200
1,455,200
864,800
2,320,000

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
Equity = Prior Month Equity Plus Current Month Net Income

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80,000 $
1,500,000
500,000
2,080,000
1,060,000
3,140,000 $

80,000
3,000,000
500,000
3,580,000
1,530,000
5,110,000

Chapter 6 Problem
Artero Corporation: Short-term Financial Planning

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.
A. Cash Budget

[Provided]
October

November

December

Cash Receipts
Collection from Customers

700,000 $

1,000,000 $

1,500,000

Cash Disbursements
Purchases
Interest Payments

800,000
12,000

Payment of Taxes

43,200

68,179

70,000
925,200

105,000
987,731

(225,200)

12,269

50,000

80,000

(175,200)

80,000

80,000

255,200
255,200

(12,269)
255,200

Other Expenses
Total Disbursements
Net Monthly Cash Flow
Beginning Cash
Additional Funds Needed (AFN)
Cash Balance Required
Additional Funds Needed (AFN)
Cumulative Borrowing (on Balance Sheet)
B. Statement of Cash Flows

800,000
14,552

[Provided]
October

Cash Flows From Operations


Net Income
Adjustments to Net Income for Cash Flows
Depreciation Expense (add back noncash)

(Increase)/Decrease in Inventory
Increase/(Decrease) in Accounts Payable
(Increase)/Decrease in Accounts Receivables
Total Adjustments
Net Cash Flow From Operations

November

64,800 $

December

102,269

10,000

10,000

10,000

0
0
(300,000)
(290,000)

0
0
(500,000)
(490,000)

0
0
(1,500,000)
1,490,000

80,000
80,000

80,000
80,000

(225,200)

Net Cash Generated/(Used) by Investments

Net Cash Flows from Financing

Total Cash Flow

(225,200)

Beginning Cash Balance


Required Ending Cash Balance

50,000
80,000

Additional Funds Needed (AFN)


Cumulative Funds Needed
Cash Surplus

255,200
255,200
0

Ending Cash Balance

80,000

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