ALMA 1

ALMA

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 ALMA 2

Part A

Quarterly Purchase Budget

The following table shows cost of goods sold calculations. The purchase budget consists of the

amount of assets that the company must purchase over the course of each budget period. The

amount stated in the budget is the amount required to ensure that an adequate inventory is

available to meet customer orders. At the simplest level, the purchase budget may simply be

related to the exact number of units expected to be sold during the budget period. The purchase

budget introduces what the business plans to purchase in inventory and how much inventory it

plans to grow or acquire over a given period of time. A budget is created using a simple formula:

the desired final stock, and the cost of goods sold, subtracting the original asset. (Brigham, and

Daves, 2018).

Workings Q1 Q2 Q3 Q4 Q1
Sales $0.65 $0.75 $0.85 $1.00 $1.20
Less Cost of sales          
Opening stock $0.60 $0.19 $0.21 $0.25 $1.25
Purchases $0.01 $0.70 $0.80 $0.95 $2.46
Ending inventory $0.19 $0.21 $0.25 $0.30 $0.95
Cost of sales $0.42 $0.49 $0.55 $0.65 $2.11
Gross Margin $0.23 $0.26 $0.30 $0.35 $1.14

In the case sales for the quarter are $0.65 in the first quarter, $0.75 in the second quarter, $0.85 in

the third quarter and $1 in the fourth quarter. The closing inventory are 25 percent of the of the

next quarter sales so, closing inventory in Q1 is $0.19, Q2 is $0.21, Q3 is $0.25 and in Q4 ending

inventory is $0.30. Another thing to be noted is that first quarter ending inventory is opening

inventory of the next quarter and the same concept implies to all the remaining quarters.

According to the case cost of good sold are 65 percent of the sales.
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Purchases Budget  
  Q1 Q2 Q3 Q4 Total
Cost of sales (65% Sales) $0.42 $0.49 $0.55 $0.65 $2.11
Add ending inventory $0.19 $0.21 $0.25 $0.30 $0.95
Less Opening inventory $0.60 $0.19 $0.21 $0.25 $1.25
Purchases $0.01 $0.51 $0.59 $0.70 $1.81
Cash payment $0.21 $0.26 $0.55 $0.65 $1.66

Multiple Assumptions are used while making the purchase cash budget. Firstly, company cost of

good sold are 65% of the sales. Furthermore, ending inventory is 25 percent of next quarters.

expected sales/ To calculate purchases ending inventory was added to the CGS and opening

inventory was subtracted to calculate the purchases. Purchases for the company are calculated

using the formula CGS= opening inventory + purchases – closing inventory (Davis, and Davis,

2019).

B. Prepare quarterly general, administration and selling budget.

The following table describes the budgeted general, administrative, and selling budget. Normal

and administrative expenditure budgets are usually prepared by the office manager to predict

what the non-selling costs will be at that time. Sales costs are all costs associated with selling a

product such as advertising, promotions, sales commissions, and shipping to customers. Many

companies prepare various budgets throughout the year helping to track costs and ensure that

profit targets are met. These budgets can address anything from a company's operations to

purchasing assets. One of the major budgets produced by management is the general and

administrative expenditure budget. The commercial, general, and administrative (SG&A) costs

of a business company include the only non-production costs in the company's operating budget.

This part of the operating budget does not include its direct production costs.1 These costs are

usually found in the item "Cost of Assets for Sale" in the factory budget statement. SG&A costs
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generally have their own line item in the budget statement allocated and divided into operating

budgets.

General and administrative expenditure budgets focus on operating costs such as administrative

salaries, depreciation, and office expenses. These non-selling costs can be calculated and

predicted. General and administrative expenditure budgets usually include both fixed and

variable costs. The office manager can easily estimate the decline of this period.

General, Admin-
istration and Sell-
  ing Budget        
  Q1 Q2 Q3 Q4 Total
Sales $0.65 $0.75 $0.85 $1.00 $3.25
Cash expenses $0.10 $0.11 $0.13 $0.15 $0.49
Capital Lease Installment 0.01 0.01 0.01 0.1 $0.13
Interest on outstanding lease lia-
bility 0.00175 0.006 0.005 0.004 $0.02
Depreciation 0.01 0.01 0.01 0.01 $0.04
Total general, administrative, and
selling expense $0.010 $0.010 $0.010 $0.010 $0.040
Depreciation 0.00175 0.006 0.005 0.004 $0.02
Cash Disbursement for GA&S
Expense $0.01 $0.00 $0.01 $0.01 $0.02

According to the given case, cash expense is 15% of the sales. Capital Lease Installment, Interest
on outstanding lease liability and Depreciation were added to calculate the total general, adminis-
trative, and selling expenses. Furthermore, as the depreciation is noncash expense so, it is sub-
tracted from the total general, administrative, and selling expense (Chandra, 2011).

C. Prepare the Cash Budget for the Q1, Q2, Q3, and Q4

The following table shows the Budget Q1, Q2, Q3, and Q4. A budget is a measure of the inflow
and outflow of a business over a period of time. This could be a weekly, monthly, quarterly, or
annual budget. This budget is used to determine whether an entity has sufficient funds to operate
within a specified period of time. A budget provides information on a company's financial needs
(and any surplus money) and helps determine the right budget. Companies use sales and produc-
tion forecasts to budget, as well as speculations about needed expenditures and collections of ac-
counts. A budget is required to assess whether the company will have sufficient funds to operate.
If the company does not have enough money to operate, it should raise extra money by taking
out stock or taking on additional debt.
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Cash flow calculates income and expenditure for the entire month and uses the final balance as
the first balance of the following month. This process allows the company to predict financial
needs throughout the year, as well as changes in the future to adjust its monetary balance for the
coming months (Jiambalvo, J., 2019).

  Q1 Q2 Q3 Q4 Total
Sales $0.500 $0.650 $0.750 $0.850 $2.750
Less Expenses          
Purchases $0.205 $0.261 $0.551 $0.645 $1.663
Gen., adm. & Selling ex-
penses $0.098 $0.113 $0.128 $0.150 $0.488
Capital lease installment $0.010 $0.010 $0.010 $0.010 $0.040
Lease interest expense (4%) $0.002 $0.002 $0.002 $0.002 $0.006
Taxes $0.047 $0.055 $0.063 $0.075 $0.242
Total expenses $0.361 $0.441 $0.754 $0.882 $2.438
Net balance $0.139 $0.209 ($0.004) ($0.032) $0.312
Opening cash balance $0.250 $0.389 $0.598 $0.594 $1.831
Ending cash balance $0.389 $0.598 $0.594 $0.562 $2.143

In the above table, sales figures are taken from the case. Purchases and General, Administration

& Selling expense is calculated in part A and B. Capital Lease Installment are also given in the

case. According to the case lease interest expense are 4% so they are calculated based on these.

All the expenses are added to calculate the total expenses and then they are subtracted from sales

to get net balance. To calculate the ending cash balance opening cash balance is added with the

net balance. In first two quarter net balance is positive and in the last two years net balance is

negative.

D. Pro forma Income Statement

Pro forma finances are not calculated using standardized accounting principles (GAAP) and

generally exclude one-time costs that are not part of the company's normal operations, such as

post-consolidation costs. In fact, a pro forma financial statement can expose anything a company

believes it hides the accuracy of its financial vision and can be a piece of useful information that
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can help assess a company's prospects. Since pro forma statements refer to possible

consequences, they are not considered to be in compliance with GAAP (accounting principles

generally accepted). This is because compliant GAAP reports should be based on historical

information.

Pro forma statements do not need to meet very strict accounting standards but should be clearly

marked as “pro forma” and cannot be used for items such as tax filing. To use unmarked pro

forma statements to discredit your business to investors, IRS, or financial institutions may be

fined by the Industrial and Trade Commission).

However, pro forma statements are still very useful. They can help you create a business plan,

create a financial forecast, and get support from potential investors or lenders.

The following table shows the pro forma income statement for the Q1, Q2, Q3 and Q4

(Weygandt, Kimmel, Kieso, and Aly, 2018).

  Q1 Q2 Q3 Q4 Total
Sales $0.650 $0.750 $0.850 $1.000 $3.250
Gross margin $0.228 $0.263 $0.298 $0.350 $1.138
Less expenses          
Depreciation $0.010 $0.010 $0.010 $0.010 $0.040
Interest expense $0.002 $0.002 $0.002 $0.002 $0.006
Selling & gen exp $0.098 $0.113 $0.128 $0.150 $0.488
Total operating ex-
penses $0.109 $0.124 $0.139 $0.162 $0.534
Profit before tax $0.119 $0.139 $0.159 $0.189 $0.604
Tax (40%) $0.047 $0.055 $0.063 $0.075 $0.242
Post tax profit $0.071 $0.083 $0.095 $0.113 $0.362

Proforma income statement is made on the general income statement were all the expenses are

subtracted from the sales to get the post-tax profit or net income. All the values are either taken

from the case or are calculated in the previous parts of the case. Company is doing very good in
 ALMA 7

terms of gross margin. We can see the overall increasing trend in the grass margin in each quarter

of the company which shows thar company is efficiently controlling the direct cost while

increasing the number of sales. The same trend in observed in the profit of the company that is

increasing trend in each quarter which is very good sign for the company. The assumption about

the depreciation of the company is “The depreciation expense is equivalent to the cost recovery

system used by the company for tax purposes”.

E. Pro Forma Balance Sheet

The following table shows budgeted balance sheet.

Pro Forma Balance Sheet as at 31 Dec 2022

Cash $0.56
Accounts receivable $1.00
Inventories $0.30
Total Current Assets $1.86
Fixed Assets  
Net fixed assets $0.11
Total Assets $1.97
Current Liabilities  
Accounts payable $0.35
Total Current Liabilities $0.35
Long Term Liabilities  
Capital lease liability $0.11
Total Long-Term liabilities $0.11
Equity $1.15
Retained earnings $0.36
Total Equity $1.51
  $1.97

F.

No line is credit is needed, as the ending cash balance is above $0.2 for each of the four quarters.

Therefore, no loan interest is payable for the year 2022

G.
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The cash stream cycle (CCC) is a metric that mirror the time it takes for an organization to

change over its interest in stock and different resources into sell-off. Likewise called the Net

Operating Cycle or Cash Cycle, the CCC endeavors to assess that every dollar of the aggregate

sum is attached to a creation and deals process before it is changed over into cash.

The cash stream cycle (CCC) is a significant similitude for an entrepreneur to comprehend. The

CCC is additionally called the total execution cycle. This cycle tells the entrepreneur the normal

number of days it takes to purchase a rundown of words, and afterward convert it into cash. That

is, it estimates the time it takes for a business to purchase administrations, convert them into an

item or administration, sell them, and gather receipts. CCC time relies upon how the organization

upholds its buy, how it permits clients to pay (credit and assortment time), and how long it takes

to gather. The low CCC is a mark of a fast stock to-deal process. The higher CCC demonstrates a

slow cycle. A low CCC is for the most part acknowledged as profoundly attractive, albeit this

relies upon your business, industry, and strength. This measurement gauges how long an

organization needs to sell its posting, how long it takes to gather its income, and how long it

needs to pay its obligations. The CCC is one of only a handful of exceptional estimation

estimates that assist with surveying the viability and effectiveness of an organization. The

propensity to diminish or balance out CCC qualities, by and large, is a decent sign while the

ascent should prompt further examination and investigation in light of different variables. One

should remember that the CCC just works in chosen regions that are reliant upon the

administration of related resources and administrations.

Cash Conversion
Cycle Days  

Debtor days 112.31  

Creditor days 51.88  

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Inventory days 51.83  

Cash conversion pe-
riod 112.26  
     
Operating Cash Cy-
cle Days  

Inventory days 51.83  

Debtor days 112.31  

Operating Cash Cy-
cle 164.14  
     
Cash Build    
Sales   $3.25
Change in receiv-
ables    
Opening receivables $0.50  
Ending receivables $1.00 $0.50
Net cash Build   $2.75
     
Cash Burn    
Operating expenses $0.16  
Decrease in inven-
tory ($0.30)  
Increase in payables ($0.15)  
Net cash burn ($0.29)  
Net cash build $3.04  

The company has been building cash for the last one year. The total cash conversion cycle was

112 days, while the operating cash cycle was 164 days. In addition, the net cash build is $2.75

for the entire year, while the net cash burn is $0.29. Therefore, the company has been

accumulating cash reserves for the period (Fabozzi, and Peterson, 2003).

h. Weighted average cost of capital

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The assessed cost of capital (WACC) is the organization that is relied upon to pay the normal add

up to all its security proprietors to back its resources. The WACC is frequently alluded to as the

monetary cost of an organization. Significantly, it is directed by the unfamiliar market and not

the supervisors. WACC addresses the base discount that an organization should get on a current

resource premise to fulfill its banks, proprietors, and different suppliers, or to contribute

somewhere else. The assessed cost of capital (WACC) addresses the normal cost of a firm from

all sources, including customary stock, favored stock, bonds, and different sorts of obligations.

The assessed cost of capital is a typical approach to deciding the necessary pace of return since it

determines, by number one, the return expected by both bond proprietors and investors to furnish

the organization with cash. The organization's WACC might be higher assuming that its

securities exchange varies or on the other hand on the off chance that its obligation seems, by all

accounts, to be unsafe on the grounds that financial backers will be requesting better yields.

Organizations gather cash from an assortment of sources: normal stock, famous stock, and

related freedoms, direct obligation, adaptable obligation, adaptable obligation, worker

investment opportunities, annuity liabilities, top investment opportunities, government

sponsorships, etc. Various protections, addressing different monetary sources, are relied upon to

make various returns. The WACC is determined considering the overall loads of each monetary

design. Assuming the organization's monetary system is perplexing, it turns out to be more

challenging to ascertain the WACC.

The following table shows calculation for the weightage of the cost of capital.

Book Weighted Cost (net of tax

WACC as at 31 Dec 2022 Cost Value credit)
Capital Lease Liability* 4.00% $0.11 0.163%

Bank loan 5.00% - 0.000%

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Long-term debt (2+3+3)% 8.00% - 0.000%

Common stock 5.80% $1.51 3.244%
Weighted Average cost of capi-
tal   $1.62 3.407%

The long-term debt includes lease liability because it is capital lease.

i.

Economic Value Added

The Economic Value added (EVA) of an organization's monetary exhibition in view of leftover

worth is determined by deducting its capital consumption from its working benefit, which is

burdened in real money. EVA may likewise be alluded to as monetary addition, as it endeavors to

catch the organization's genuinely financial advantages. The drive was planned by the executives

counseling organization Stern Value. Indeed, it is utilized to quantify the worth of a creation

organization by its speculation. Assuming an organization's EVA is negative, it implies the

organization isn't delivering how much cash put resources into the business. The EVA

measurements show that there are three critical parts of the organization's EVA - NOPAT,

venture, and WACC. NOPAT can be determined face to face however is typically remembered

for the monetary records of a public organization. The sum contributed is how much cash used to

finance a specific organization or venture. WACC is the normal profit from an organization that

hopes to pay its financial backers; loads are determined as a feature of each monetary source in

an organization's monetary design. WACC can likewise be counted however is typically given.

EVA assesses the exhibition of the organization and its administration as in the business is

beneficial just when it makes abundance and gets back to investors, subsequently requiring

something beyond the expense of the organization's capital.

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EVA as an exhibition pointer is extremely helpful. The measurements show how and where the

organization is creating financial stability, by including asset report things. This powers

supervisors to know about resources and costs while settling on administration choices.

Nonetheless, the EVA estimation is exceptionally subject to the worth of the venture and is

best utilized on affluent, stable, or mature organizations. Organizations with immaterial

resources, for example, innovation endeavors, may not be qualified contender for EVA

testing.

Year
  2025
Operating income $3.80
Invested capital  
Capital lease liability $0.40
Bank loan $0.50
Long-term debt $1.00
Total equity $2.35
Total Invested Capital $4.25
   
Economic value added $1.31

The company is adding economic value, as its net income exceeds the expected return on

the invested capital (Porter, 2021)

Workings: WACC in Book Weighted

2025 Value Cost Cost
Capital lease liability $0.40 4.00% 0.23%
Bank loan $0.50 5.00% 0.35%
Long-term debt $1.00 8.00% 1.13%
Total equity $2.35 5.80% 3.21%
  $4.25   4.92%
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Book values are taken from the pro forma statement from the given case.

j. Proportion of ownership for the new investor

A firm's value, otherwise called Firm Value (FV), Enterprise Value (EV). It is a monetary idea

that mirrors the value of a business. It is the value that a business deserves at a specific date.

Hypothetically, it is a sum that one necessity to pay to purchase/assume control over a business

substance. Like a resource, the value of a firm not entirely settled based on either book value or

market value. Yet, by and large, it alludes to the market value of an organization. EV is a more

extensive substitute for market capitalization and can be determined by following more than one

methodology.

The following table shows the calculation for the proportion of the ownership for the new

investors (Rustagi, 2021; Coe, McNally, Patch, Phillips, and Smith, 2018).

Total equity before outside investment $1.15        

New investment $2.00        
  2022 2023 2024 2025 Terminal
Operating cash flows $0.21 $0.47 $1.22 $2.28 $95.68
Discount factor (wacc) 0.9671 0.9352 0.9044 0.8746 0.8458
Present value $0.20 $0.44 $1.10 $1.99 $80.92
Value of firm $84.66        
Less Debt $0.11        
Value of Equity $84.55        
New investment ($2m) $2.00        
Proportion of ownership for the new in- 2.37%        
vestor
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References

Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.

Fabozzi, F.J. and Peterson, P.P., 2003. Financial management and analysis (Vol. 132). John

Wiley & Sons.

Brigham, E.F. and Daves, P.R., 2018. Intermediate financial management. Cengage Learning.

Jiambalvo, J., 2019. Managerial accounting. John Wiley & Sons.

Davis, C.E. and Davis, E., 2019. Managerial accounting. John Wiley & Sons.

Weygandt, J.J., Kimmel, P.D., Kieso, D.E. and Aly, I.M., 2018. Managerial Accounting: Tools

for Business Decision-making. John Wiley & Sons.

Porter, K., 2021. The Weighted Average Cost of Capital and Investment; new insights from

Emerging Markets (Doctoral dissertation, Concordia University).

Coe, K.M., McNally, S.E., Patch, D.J., Phillips, J.N. and Smith, T.C., 2018. Investment

management.

Rustagi, R.P., 2021. Investment Management Theory and Practice. Sultan Chand & Sons.