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Palouse Electric Essay

2375 words - 10 pages

Palouse Electric

1. Prepare a sources and uses statement for the 2003-2004 forecasted results and for the 2003-2004 actual results.
Ans.: The sources and uses statement for 2003-2004 forecasted and actuals are shown as below:
Sources and use statement
2003-2004 Forecasted 2003-2004 Actual Variance
Accounts Source Use Source Use Source Use
Net income $65,000 68,800 3,800
Dividend 43,000 43,000 0
Depreciation 3,300 3,700 400
Cash 27,500 25,800 (1,700)
AR 18,400 49,600 31,200
Inventory 17,400 148,400 131,000
Deferred charges 600 400 (200)

Accounts payable 1,000 ...view middle of the document...

Inventory should be sold to convert into revenue, inventory sitting around is not good.
In both projected and actual statements a major use of funds is dividend. A growing company should not pay so many dividends. The money should be used in the growth assets.
2. Utilizing the two sources and uses statements evaluate the growth plan and identify areas in which significant deviations occurred. Of those deviations which were the most critical and why?
Ans.: Looking at the above source and use statements, we can infer that the company projected a growth of 20% in the sales for the year 2004. In this growth plan they wanted to build a storage facility thus saving on warehouse rent. The funds needed for this activity and seasonal variations in the sales was to be obtained through a loan from a bank. There are several sizeable variations in the forecasted and actual results These are summarized as below:
(i) Inventory: The forecasted growth in inventory was $17,400 the actual inventory was $148,400 a variance of $131,000. This is a very large variance in the inventory. Either the company was trying to grow in a unplanned manner or they did not forecast it well. I made a forecast based on the data provided and a target growth of 20%. The inventory needed in the year 2004 according to my forecast is for $199,426 and an extra purchase of $32,646 is needed for this purpose.
(ii) Accounts Receivable: Accounts receivable increased by $31,200 from the forecasted value. This basically means that the collection of AR was timely and may be in order to grow the sales company allowed more credit sales.
(iii) Accounts payable: AP increased substantially almost by $109,000. This reflects the large purchases made for inventory and they were made on credit. This is good in some sense as the company is using AP as a financing for its assets. However one has to be very carefully in not letting this grow beyond control as this can be a potential problem for the company if they cannot collect their sales revenue in time to pay for the AP.
The forecasted financial statements of 2004 show a growth rate of 20%. In actual the growth rate was 63.15%. Using the ratios ROE and ROI and the plowback rate, I calculated the internal growth rate. This comes out to be
Projected Actual
2003 2004 2004
Internal growth rate 3.90% 5.52% 4.48%

It is clear that the projected growth rate of 20% is about 3.5 times that internal growth rate. The actual growth in sales is about 65% which is about 12 times the internal growth rate. It is very likely that the company will face cash problems due to the rapid growth.

3. Why did Palouse ask for $75,000 when they forecast an end of year need of only $11,200?
Ans.: The EFN required of $11,200 has been calculated at the end of the year. But Palouse needs more cash flow during the year in order to conduct their business (for net working capital). Only at end of the year this NWC will be freed up.
4. Were the original...

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